You recently went to work for Allied Components Company, a supplier of auto repair parts used in the aftermarket with products from Daimler AG, Ford, Toyota, and other automakers Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for tw proposed projects. Project L involves adding a new item to the firm's ignition system would take some time to build up the market for this product, so the cash inflows would increase over Sime. Project involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives because Allied is planning to introduce entirely new models after 3 years Here are the projects cash flows in thousands of dollars): CFL CFS 1 2 $10 100 520 Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. The CFO also made subjective risk assessments of each project and he concluded that both projects have risk characteristics that are similar to the firm's average project Allied's WACC is 10% You must determine whether one or both of the projects should be accepted WACC The solution can be found using Excel's NPV function, which finds the NPV of CF1 to CFN and then add the value of CFO to the result NPVL NPVS- Choose both projects if they're independent, but if 2) What is each projects R The internal rate of return) that discount rate which forces the NPV of a project to qual The solution to this equation RAS Choose both projects if they're independent, but if As a separate project (Project P), the firm is considering sponsoring a pavilion at the upcoming World's Fair. The pavilion would cost $800,000, and it is expected to result in $5 million of incremental cash inflows during its one year of operation. However, it would then take another year, and $5 million of costs, to demolish the site and return it to its original condition. Thus Project P's expected cash flows in mitions of dollars) look the 1 2 Cash Flow (50) $5.0 WACC . 10% The project is estimated to be of average risk, so it WACC 10 What is Project P's NPV? What is RR? However, since this project has nonnormal cash flows, we must be aware of the possibility of multiples. Therefore, we will perform the IRR calculation again, but this time a guess of 300% Indeed, it is revealed that two exist. Because there are two sign changes in the cash flow stream, we can be sure that there are two and only two Rs.