Your boss, the chief financial officer $($CFO$)$ for Dream Analytics Inc., has just handed you the estimated cash flows for two proposed projects. Project A involves adding a new item to the firm$$s Digital Intelligence software line. It would take some time to build up the market for this product, so the cash inflows would increase over time. Project B involves an add$-$on to an existing Global Integration self$-$guided software line, and its cash flows would decrease over time. Both projects have $4-$year lives because Dream Analytics is planning to introduce an entirely new Artificial Intelligence software product at that time. The budget is $$25,000$ for the initial investment.

Here are the estimated net cash flows $($in thousands of dollars$)$:

Expected Net Cash Flows

Year Project A Project B

$0$ $$(25,000)$ $$(25,000)$

$1125009000$

$2990023000$

$32100011000$

$4140001500$

The CFO also made subjective risk assessments of each project, and he concluded that the projects both have risk characteristics that are similar to the firm$$s average project. Dream Analytics$$ required rate of return is $9\%($use this rate for your financing and reinvestment rate$).$ You must now determine which of the projects should be accepted. Start by answering the following questions:

a$.$ What is capital budgeting? Are there any similarities between a firm$$s capital budgeting decisions and an individual$$s investment decisions?

b$.$ What is the difference between independent and mutually exclusive projects? Between projects with conventional cash flows and projects with unconventional cash flows?

c$.(1)$ Define the term net present value $($NPV$).$ What is each project$$s NPV$?$

$(2)$ What is the rationale behind the NPV method? According to NPV$,$ which project or projects should be accepted if they are independent? Mutually exclusive?

d$.(1)$ Define the term internal rate of return $($IRR$).$ What is each project$$s IRR?

$(2)$ Which project should be accepted? Explain Why?

f$.(1)$ Define the term modified internal rate of return $($MIRR$).$ What is each project$$s MIRR?

$(2)$ What is the rationale behind the MIRR method? According to MIRR, which project or projects should be accepted? Explain Why?