Consider the following two mutually exclusive projects for Maura, Inc.: CASH FLOWS, DOLLARS (in millions)

Project C0 C1 C2 C3

A -100 +60 +60 0

B -100 0 0 +140

Calculate the NPV of each project for discount rates of 0, 10, and 20 percent. Plot these on a graph with NPV on the vertical axis and discount rate on the horizontal.

What is the approximate IRR for each project?

In what circumstances should the company accept project A? Why?

Calculate the NPV of the incremental investment for discount rates of 0, 10, and 20 percent. Plot these on your graph. Show that circumstances in which you would accept A are also those in which the IRR on the incremental investment is less than the opportunity cost of capital.