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Table A (figures in millions).<4 Projects A and B are mutually exclusive - your firm can take only one.
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Question

Table A gives investments, NPVs, IRRs and the first three years' cash flow for several capital investment projects. Each project's cash flows continue for several more years, longer for some projects than others. The cost of capital is 12% for all projects.

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(a)   Which project would you choose, A or B? (No need to explain in this part)

(b)   Suppose that the firm now identifies a new project AA with exactly the same cash flows, NPV and IRR as project A. Does the opportunity to invest in AA change your answer to part c?

(c)   Suppose the firm has only $200 million to invest - a fixed capital constraint. Which projects would you undertake? (Ignore project AA.)

(d)  Now the firm negotiates a line of credit that allows it to borrow up to $100 million at 8%. Would access to additional debt capital at a cost of 8% change your answers to questions a, b or c?

ACTSC372Q6.jpeg
Table A (figures in millions).<4 Projects A and B are mutually exclusive - your firm can take only
one. The projects are discrete - you cannot make partial investments in any projecte

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Subject: Business, Finance

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