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b. If the projects are not mutually exclusive, which of these projects should you adopt? Why?

c. If the projects are mutually exclusive (i.e., you can only adopt one), which should you adopt? Why?

There are many possible adoption criteria that a firm can use to decide whether or not to adopt a particular project. One such criterion is to adopt all non-mutually exclusive projects that generate a positive Net Present Value (NPV), where NPV is defined as the present value of all the positive and negative cash flows associated with the project; a positive cash flow at a particular time period represents an in-flow of cash net of any expenses during that period; a negative cash flow at a particular time period represents an outflow of cash (expenses exceeding revenues). The discount rate used should be the required rate of return (RRR), also called the opportunity cost of capital (both are the return the firm could get if, rather than investing in the project being considered, it invested in other assets or securities with the same risk as the project). The NPV of a project is the additional wealth to the owners of the firm that that project generates. Thus, if the NPV is positive, if adopted, the owners of the firm will get wealthier; management should adopt all positive NPV projects - since they work for the owners of the firm. Another criterion is based on the internal rate of return (IRR) of the project. The IRR is defined the single discount rate that, when applied to all of the cash flows of the project, makes the present value of the cash flows equal to zero. (It is like a YTM on the project.) The adoption rule is to take all projects that have an IRR greater than the opportunity cost of capital or RRR. In some cases, the IRR rule is misleading (see the cases below). Sometimes the IRR can exceed the cost of capital, but the NPV is negative at the cost of capital. The examples below have you explore this. Consider the following (see next page) five projects (and their projected cash flows and initial costs). a. For each project, calculate the following variables (you will need to use goal seek or solver to calculate IRR): Do the two adoption criteria agree with each other? That is, when one implies you should adopt (reject) the project, does the other also imply you should adopt (reject)

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