Consider the following two mutually exclusive projects:

Year Cash Flow ( Project A) Cash Flow (Project B)

0. -400,000. -20,000

1. 0. 20,000
2. 80,000. 10,000
3. 500,000 5,000

Whichever project you choose, if any, you require a 10 percent return on your investment.

a). If you need the initial investment to be recouped within 2 years, which investment will you choose? Why?

b). Using internal rate of return, which investment will you choose? Why? c). If you only care about increasing the firm's value, which investment will you choose? Why? d). Based on your answers in (a) through (c), which project will you finally choose? Why?

e). Would you change your decision if the projects now become independent?