Michael has requested some help in estimating the The expected cash flows for the two are: Yr. Project 1 Project 2 0 - $20 million -$30 million (Initial cash outlay for each project) 1 + $12 million +$5 million 2 + $8 million +15 million 3 + $5 million +20 million He knows that for similar projects, his company has a required return of 12%, and a cost of capital of 10% so he decides to use the 12% required rate of return in his calculations. To impress his boss, he wants to do a detailed analysis. He wants to answer all of the following questions: 1. He decides to use the IRR method first. He wants to see which project is better according to the IRRs. Which project is the best using IRR? 2. Is IRR an acceptable method to compare two mutually exclusive projects? 3. Is NPV an acceptable method when comparing two mutually exclusive projects? 4. Later, he visits one of his colleagues and talks about his findings. His colleague recommends him to check the NPVs also. He says “O.K. Why not? Confirming my findings with the other method would be nice”. What does he find? Do NPVs confirm his earlier findings? 5. Are both methods (i.e. NPV and IRR) good in these situations? What would you do? According to your opinion, which project is better for this company? 6. Does IRR always choose the same project whether a firm has a high cost of capital or a low cost of capital? 7. How about NPV? Does NPV always choose the same project whether a firm has a high cost of capital or a low cost of capital? 8. Over what range of discount rates should we choose Project A? Project B? 9. If they were independent projects rather than mutually exclusive projects, what would we do?