1. Buridan is choosing between two projects, Hay1 and Hay2. The projects have very different nature and can not be implemented together. The cash flows of both projects are given below:
year Hay1 Hay2
0 -17000 -15000
1 1000 3000
2 3000 5000
3 3000 4000
4 2000 4000
5 6000 5000
6 5000 4000
7 10000 1000
Buridan can fund the selected project with a loan from a local bank but unfortunately, it is unclear what interest rate the bank will require.
a. Plot the NPV profile graph and explain to Buridan, which project should be selected under different interest rate levels.
b. Suppose that the interest rate is 10%. In how many years each of the projects will pay back according to the discounted payback method (assume that cash inflows are earned at the end of each year).