1. Your division is considering two investment projects, each of which requires an up-front expenditure of $25 million. You estimate that the cost of capital is 10 percent and that the investments will produce the following after-tax cash flows (in millions of dollars):

Year Project A Project B

1 5 20

2 10 10

3 15 8

4 20 6

a.What is the regular payback period for each of the projects?

b.What is the discounted payback period for each of the projects?

c.If the two projects are independent and the cost of capital is 10 percent, which project or projects should the firm undertake?

d.If the two projects are mutually exclusive and the cost of capital is 5 percent, which project should the firm undertake?

e.If the two projects are mutually exclusive and the cost of capital is 15 percent, which project should the firm undertake?

f.What is the crossover rate?

g.If the cost of capital is 10 percent, what is the modified IRR (MIRR) of each project?

Shao Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $30 million per year. Plane B has a life of 10 years, will cost $132 million, and will produce net cash flows of $25 million per year. Shao plans to serve the route for 10 years. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the company's cost of capital is 12 percent. By how much would the value of the company increase if it accepted the better project (plane)?