______________________________ Question 1 - Project Selection Rules You are analyzing two projects with the cash flows shown below. Year Project 1 0 ($6,000) 1 $1,000 2 $1,000 3 $1,500 4 $2,000 5 $4,000 Project 2

($6,000)

$2,500

$2,000

$1,500

$1,000

$1,500 Please construct an NPV chart with discount rates from 1% - 25%. please identify and label the following points: On your NPV chart, a. TheIRRofproject1(calculatethevalueandlabelthevalueonthechart) b. TheIRRofproject2(calculatethevalueandlabelthevalueonthechart) c. The discount rate at which the NPV of the two projects is equal - i.e., the NPV of project 1 is equal to the NPV of project 2. (calculate the value and label the value on the chart) Questions related to the two projects (and the NPV chart): d. Whichprojecthasthe"steeper"NPVlineasafunctionofthediscountrate? Why does this project have a steeper NPV line as a function of the discount rate? e. Ifyoucanonlydooneofthetwoprojects,whichprojectwillyoudoifyourfirm'scost of capital is 6%? Why? f. If you had no capital constraints (i.e., if you had unlimited funds), which projects would you do if your firm's cost of capital was 10%? g. I

ifyoucouldonlydooneproject,whichprojectwouldyoudoifyourfirm'scostof capital was 10%? Why? h. Which projects would you do if your firm's cost of capital was 16%? Why?