1) Mainline is a manufacturing company considering two investment projects (A and B) which are mutually exclusive. Project A will cost $210,000 whilst project B costs $130,000. A market research has been carried out to evaluate the viability of the projects at a cost of $10,000 (for each). These have been included in the projects' costs. The following cash flows are predicted for each projects: Cash flows ($) Project C1 C2 C3 C4 C5 A 40,000 70,000 70,000 70,000 40,000 B 70,000 50,000 20,000 10,000 10,000 a. Assuming a discount rate of 7 per cent, what is the NPV of the two projects? Based on the NPV criteria identify which projects you would accept and explain why. (5 marks) b. Examine the factors that a firm might consider in determining the discount rate to use in the NPV calculation. (4 marks) C. Calculate the IRR of each project. Using a hurdle rate equal to the discount rate, identify which projects you would accept and explain why. (3 marks) What is the hurdle rate used in the IRR calculation ? (2 marks) d. Calculate the payback period for each project. Given the firm only accepts projects that pay back within 3 years, identify which projects you would accept and explain why (3 marks) e. What are the limitations of IRR ? Explain how the limitations are addressed through the NPV method ?(5 marks) f. Explain why the NPV method leads to decisions that are consistent with the objective of wealth maximization. (3 marks)

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