Agile Time Systems, Inc. is considering the development of one of two mutually exclusive new pieces of timing equipment to be used in canine agility trials. Each will require a net investment of $5,850. The cash flows for each project are shown below:
Year Model A Model B
1 $2,500 $1,450
2 $3,260 $3,750
3 $1,820 $2,810
Model A is of higher-than-average risk, and Model B is of average risk. The firm's WACC is 10%. To risk-adjust, the firm's policy is to add 1.5% to WACC for projects that are riskier than average and to deduct 2% from WACC for projects that have less than average risk.
a) Which model should Agile Time choose based on the NPV criterion?
b) Which model should Agile Time choose based on the IRR criterion? Why should it choose this one?