The CFO for the Stockton Company is considering proposals to invest in two mutually exclusive projects. Project A, which requires an immediate investment of $10,000, will generate cash inflows of $5047 at the end of each of the next three years. Project B also requires an initial investment of $10,000. However, project B will generate perpetual year end cash inflows of $2200. B.B. believes that project A is superior to project B, since project A has an IRR of 24 percent whereas the IRR for project B is only 22 percent.
a. Assuming that the opportunity cost of capital is 12 percent, which project should the Stockton Company invest in?
b. Does your decision in part (a) change if B.B. assumes that project A can be replicated (with the same prospective costs and benefits) at the end of the third year and every three years thereafter for a period of indefinite length?