Problem:

Jekyll and Hyde, Inc. has just purchased the rights to a movie. The company has the option of producing the movie on either a large budget of $25 million or a small budget of $10 million. The cash flow in year 1 for the large budget movie is $65 million, while the cash flow in year 1 for the small-budget movie is $40 million. The cost of capital is 25%. Which project should be accepted?

Required:

a. The large-budget movie because the IRR is higher.

b. The small-budget movie because the NPV is lower.

c. The large-budget movie because the NPV is higher.

d. The small-budget movie because the IRR is lower.

Note: Provide support for your rationale.