$1$ Case Study #$1-$ Chapter $7,$ The Techniques of Capital Budgeting

$2$ Textbook, Page $188$ and $189,$ Problem $20.$a$-$c

$4$ As chief financial officer you must approve or reject projects based upon the company's traditional capital

$5$ budgeting method: the IRR. Your financial analysts recently calculated the cash flows that would be

$6$ produced by two projects suggested by the marketing department. Half of the marketing team favored

$7$ one project and half favored the other project. The cash flow analysis indicated the following cash flows

$8$ for each project, one called Peanut Butter and the other Chocolate:

Cash Flows in:

$15$ Both projects look pathetic. The Peanut Butter project actually has more dollar outflows than inflows. The

$16$ Chocolate project does not begin for another year and has future inflows equal to outflows. Nevertheless, in

$17$ order to evaluate the projects in terms of company policy, you compute the intemal rate of retum of each

$18$ project. Sure enough, the intermal rate of return of Peanut Butter is $-42\mathrm{.}265\%.$ The intemal rate of return of

$19$ Chocolate is $0\%.$ Because your company requires a rate of retum of $15\%,$ you send out the bad news that both

$22$ Several days later the whole marketing department runs into your office with some startling news: In a seminar

$23$ on working together, they learmed the value of teamwork, and they suggest that the two projects be put

$24$ together to form one great project. None of the revenues or expenses will change, so the combined project

$25$ looks like this:

$27$ Cash Flows in:

$28$

When plugged into the computer, the project produces an intemal rate of retum of $20\%.$ Because this intemal

rate of return exceeds the company$-$required rate of retur, it looks like both projects can go ahead.

a$.$ Verify that the intemal rates of retum have been computed correctly.

b$.$ Find the net present value of each project and the combination using a discount rate of $15\%.$

c$.$ Discuss what you would do$,$ and why internal rate of return did or did not work.

I need help with b