Your division at Clean & Safe Chemicals, Inc. is considering two (2) investment projects: Project A and Project B. The firm's cost of cost of capital is 10%. Both projects require an initial outlay of $30 million and their projected cash flows (in millions of dollars) would be as follows:
Period 1 2 3 4
Project A $5 $10 $15 $20
Project B $20 $10 $8 $6
Based on this information:
a. Evaluate each project's net present value (NPV),* internal rate of return (IRR),* and payback period.
b. If the two projects are independent, which project(s) would be chosen? Explain.
c. If the two projects are mutually-exclusive, which project(s) would be chosen? Explain.
d. If the cost of capital was 5%, would this change your recommendation if the projects were mutually-exclusive? Explain.
e. Determine the "crossover rate" for Projects A and B and explain what this rate is and how it affects the choice between mutually-exclusive projects.