Section B Question B1 A) Elton Corporation is considering two independent projects. Both projects have the same initial cost and will last for 4 years. The expected cash inflows for both projects are as follows: Year Project A (5) Project B ($) 1 36000 30.000 2 38,000 39.000 3 42,000 44,000 4 39,000 49.000 D) Project A has a required return of 15 percent while project B has a required return of 18 percent. The company has computed the profitability index (PD) of project A to be 1.1. What should be the investment decision of Elton Corporation relating to these two projects? 11) Eplain your investment decision in (1). 0 B) Repulse Bay Corporation is trying to choose between two mutually exclusive projects. Project A has a 5 year expected life while project B has a 4 year expected life. The after tax cash flows of both projects are as follow: Year Project A (S) Project B (S) - 120.000 -90,000 1 35,000 45,000 2 42,000 37,000 3 48,000 28,000 40,000 25,000 5 36,000 Assume that both projects can be repeated and that there are no anticipated changes in the cash Nows. Repulse Bay Corporation required a return of 17 percent for both investments b) Using the equivalent annual annuity (EAA) approach, which project should the company choose? 4 ii) Explain why we can make our investment decision in () using the equivalent annual annuity (EAA) approach