Your department is evaluating two potential initiatives, both of which are expected to produce after-tax cash flows in millions of dollars. The Weighted Average Cost of Capital (WACC) for the division is 10%.

(years) 0 1 2 3 4

Project A -30 5 10 15 20

Project B -30 20 10 8 6

Questions:

1. Calculate the projects regular paybacks, discounted paybacks, NPVs, profitability index, and IRRs.

2. If the two projects are independent, which project(s) should be chosen?

3. If the two projects are mutually exclusive and the WACC is 10%, which project(s) should be chosen?

4. If the WACC was 5%, would this change your recommendation if the projects were mutually exclusive? If the WACC was 15%, would this change your recommendation? Explain your answers.

5. Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explain your answer.

6. Now look at the regular and discounted paybacks. Which project looks better when judged by the paybacks?.