Suppose you have two mutually exclusive projects that you can carry out either on Younge Street or King West: build an ax throwing facility or a floating spa. Assume that the ax throwing facility has the following cash flows: an immediate cash outlay of $50,000 followed by inflows of $25,000 in each of the next three years, and zero thereafter. The floating spa has the following cash flow: an immediate outlay of $50,000 followed by inflows of nothing in year one, $10,000 in year 2, $70,000 in year 3, and zero thereafter

a. What it the NPV of the floating spa project? Which project would you choose given you NPV calculations.

b. People often calculate the Internal Rate of Return (IRR), defined as the cost of capital (i.e., required rate of return) at which the projects NPV=0. This can lead to incorrect investment decisions, if the IRR is used as an investment criterion, ignoring the actual cost of capital. If you base your investment decision on whichever project has the highest IRR, which do you choose?