(Project ranking) Two independent potential capital projects are under evaluation by Burdett Company. Project 1 costs $800,000, will last 10 years, and will pro¬ vide an annual annuity of after-tax cash flows of $170,000. Project 2 will cost $1,200,000, last 10 years, and provide an annual annuity of $220,000 in annual after-tax cash flows.

a. At what discount rate would management be indifferent between these two projects?

b. What is this indifference rate called?

c. If the firm’s cost of capital is 10 percent, which project would be ranked higher?