Formulas NPV CFT (1+r)T CF CF2 CF3 NPV = CFo (1+r) (1+r) (1+r)3| PV Annuity 1 (1+r) PV Annuity CF x r PV Perpetuity PV Perpetuity EAR - (1 - 1 EAR= + where r is the simple interest rate per period, tis the number of periods, m is the number of compounding periods per year, and CF is the cashflow in period t. Choosing Between two Mutually Exclusive Projects Question 2: A company can either invest in project A, project B, or neither (the projects are mutually exclusive and the company has no other investment options). Project A requires an initial investment of $1,000,000 and provides cash flows of $300,000 a year for six years. The project will also return $200,000 in capital back to the company in year six. Project B requires a $375,000 investment and will have cash flows of $200,000 a year for 4 years. The firm's hurdle rate for these projects is 8 %. a) Which project, if any, should be chosen? b) Is the IRR of project A over 8% , below 8%, or exactly 8%? c) Is the IRR of project B over 8%, below 8%, or exactly 8%? d) Which project has the higher IRR? How do you know