Suppose you are evaluating two mutually exclusive projects, Thing 1 and Thing 2, with the following cash flows:
| |
End-of-year Cash flows |
|
Year
|
Thing 1
|
Thing 2
|
|
0
|
-$10,000
|
-$10,000
|
|
1
|
3,293
|
0
|
|
2
|
3,293
|
0
|
|
3
|
3,293
|
0
|
|
4
|
3,293
|
14,641
|
a. If the cost of capital on both projects is 5%, which project, if any, would you choose? Why?
b. If the cost of capital on both projects is 8%, which project, if any, would you choose? Why?
c. If the cost of capital on both projects is 11%, which project, if any, would you choose? Why?
d. If the cost of capital on both projects is 14%, which project, if any, would you choose? Why?
e. At what discount rate would you be indifferent when choosing between Thing 1 and Thing 2?