Manager A: A 5-year project with initial investment (Year 0) of -$100,000. Year 1 projected revenue is $100,000, year 2 $100,000, Year 3 $50,000 and year 4 $90,000. The cost of goods sold for year 1-4 is 25% of revenues, SG&A expense is 15% of revenues, no interest expenses, the Corporate tax rate is 35%. The project is over after with no more cash flows.

Manager B: These are the projected cash flows for the project.

Year Cashflow

0 -100,000

1 15,000

2 25,000

3 25,000

4 24,000

5 19,000

6 19,000

7 13,000

8 19,000

Questions 3: After examination, you realize the required return for manager Bs project is actually 15% due to higher risk. If this is the case, which project would you choose based on IRR and NPV? (RR for manager A is still 10%.)

Question 4; Yale Bancorp came to visit you and offer an annual compounding zero-coupon bond to finance your projects. The terms of the bond are you receive $100,000 today but you will have to repay at the end of the project with $175,000. If the YTM is 10%, would you accept this bond for project A? Project B?