Analyzing two mutually exclusive projects with the following cash flows:
Year A B
0 -$4,000,000 -$4,000,000
1 $2,000,000 $1,000,000
2 $1,500,000 $1,500,000
3 $ 1,250,000 $1,700,000
4 $1,000,000 $2,400,000
a. Estimate the net present value of each project, assuming a cost of capital of 10%. Which is the better project?
b. Estimate the internal rate of return for each project. Which is the better project?
c. What reinvestment rate assumptions are made by each of these rules? Can you show the effect on future cash flows of these assumptions?
d. What is the modified internal rate of return on each of these projects?
3. You own a rental building in the city and are interested in replacing the heating system for the building. You are faced with the following alternatives:
a. A solar heating system, which will cost $ 12,000 to install, $ 500 a year to run, and will last forever. (Assume that your building will too.)
b. A gas-heating system, which will cost $ 5,000 to install, $ 1000 a year to run, and will last 20 years.
c. An oil-heating system, which will cost $ 3,500 to install, $ 1200 a year to run, and will last 15 years.
If your opportunity cost is 10%, which of these three options is best for you? ( 5 points)
please show work in excel