1. In the following table we have cash flows for two mutually exclusive projects under consideration by your firm. You are asked to evaluate the two projects using both the NPV and IRR rules (applied to mutually exclusive projects). Which project do you propose that your firm should proceed with?

	Project 1 Cash Flows	Project 2 Cash Flows
Yr 0	-500	-900
Yr 1	300	200
Yr 2	200	300
Yr 3	100	600

a. Plot the NPV profile for each project on the same set of axis. Label both axis appropriately in terms of symbols.

b. Now label the numerical values of the Y-axis intercepts for each profile. You must show with an equation how you came to these two values.

c. Label the numerical values of the X-axis intercepts for each profile. You must explain why the number is what it is? Why did you use a particular function on either your calculator or EXCEL to find these.

d. When you superimpose both NPV profiles on one graph the graph will easily allow you to determine which project is superior depending on whether you are using the NPV rule or the IRR rule. Obtain the numerical value for the crossover rate in the graph. You must use either excel or your financial calculator to find this rate. What is true about the relative attractiveness of the two projects (according to NPV) at the crossover rate?

e. Now, looking at the graph, Which project is preferred according to the NPV rule for mutually exclusive projects if the cost of capital is 5%? Explain in one sentence. You need not do calculations here if you have drawn (and labeled) your graph correctly.

f. At the same discount rate as in part e, which project would you choose according to the IRR rule for mutually exclusive projects? Explain why, including a statement of the rule in order to support your conclusion.

g. What has this exercise shown you about using NPV vs IRR in the case of mutually exclusive projects with differences in scale.

2. Suppose your firm is considering undertaking a project. The firm has forecasted that unit sales will be 5000 units per year at a price of $9500 each. Variable costs are projected to be $350 per unit, and the project is expected to have a 4 year life. Fixed Costs are projected to be $350,000 per year. Additionally, the firm will need to invest $1,125,000 in manufacturing equipment. Assume the equipment is depreciated straight line over its 4 year life. In 4 years, the equipment will be worth half of what it paid for it. An initial investment in NWC of $1,150,000 will be required at time 0. After that NWC will be 25% of sales. Assume that at the end of the project all NWC is recovered.

Assume a tax rate of 34% and the discount rate for this project of 28%.

a.Evaluate whether the firm should undertake this project using NPV analysis. In this problem you are expected to show your work- I need to see how you obtain your free cash flows that you will need to conduct your NPV analysis. Note there are several steps to getting to free cash flows so I need more detail, either a spreadsheet or via calculator calculations.

b.Once you have done this, please explain in no more than a few sentences, how you might conduct a scenario analysis. Suppose you were in a case competition and a judge asked you this question. In your explanation you should make clear you know what scenario analysis means (as opposed to just sensitivity analysis) and be sure to refer to relevant values in the above analysis. I DO NOT WANT YOU TO CONDUCT a scenario analysis.