Question: NIKE is considering two mutually exclusive projects: A and B. The projects have the following characteristics: project A requires an initial investment of $75,000 and
NIKE is considering two mutually exclusive projects: A and B. The projects have the following characteristics: project A requires an initial investment of $75,000 and will generate cash flows of $15,000 per year for eight (8) years. Note that at the end of the 8 years, the machinery will have a value of zero. On the other hand, project B requires an initial investment of $166,000 and will earn cash flows of $25,000 per year for the next seventeen (17) years. At the end of year 17, the machinery will have a value of zero. All projects can be replicated indefinitely. Also, the company pays no taxes. Please note that the beta of project A is 0.80 and the beta of project B is 1.3. The risk-free rate is 3%, and the expected return on the market is 10%. These rates will remain forever. What project should Nike undertake?
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