You need to consider two projects which have the following cash flows: Project A requires an initial investment of $10,000 and will generate net cash flows of $5,000 at the end of year 1, $6,000 at the end of year 2, $7,000 at the end of year 3, and $8,000 at the end of year 4. At the end of year 2, maintenance costs of $8,000 will have to be disbursed. Project B requires an initial investment of $15,500 and will generate starting at the end of each year, net cash flows of $6,000 per year for 6 years (first cash flow in year 1). It will incur maintenance costs of $8,000 at the end of year 3.

Assume that the required return is 12% per annum for both projects.

(4 marks) Draw timeline showing the cash flows of projects A and B?

(5 marks) Find the NPV of projects A and B?

(7 marks) Which project should be chosen if Projects A and B are mutually exclusive? Explain.

(2 marks) Which project should be chosen if the Projects A and B are completely independent? Explain.

(2 marks) Based on the cash flows of project A, explain why IRR is not an appropriate evaluation technique for this project?