1. **Problem statement:** Linda's company can invest in only two projects out of four, each requiring an initial investment of 200,000,000 and lasting 3 years. We need to find the best two projects based on Net Present Value (NPV) and Internal Rate of Return (IRR) at a cost of capital of 11.5%. Cash flows are given for each year and project. 2. **Calculate NPV for each project:** Use the formula: $$\text{NPV} = \sum_{t=0}^3 \frac{CF_t}{(1 + r)^t}$$ where $CF_t$ is the cash flow at year $t$, and $r = 0.115$. - **Project JAN:** $$NPV = -200000000 + \frac{150000000}{1.115} + \frac{100000000}{1.115^2} + \frac{65000000}{1.115^3}$$ Calculate each term: $\frac{150000000}{1.115} = 134529147.98$ $\frac{100000000}{1.115^2} = 80365369.48$ $\frac{65000000}{1.115^3} = 46677184.58$ Sum: $$NPV = -200000000 + 134529147.98 + 80365369.48 + 46677184.58 = 61494502.04$$ - **Project FEB:** $$NPV = -200000000 + \frac{170000000}{1.115} + \frac{80000000}{1.115^2} + \frac{60000000}{1.115^3}$$ Calculate each term: $\frac{170000000}{1.115} = 152522893.09$ $\frac{80000000}{1.115^2} = 64292375.58$ $\frac{60000000}{1.115^3} = 43016151.31$ Sum: $$NPV = -200000000 + 152522893.09 + 64292375.58 + 43016151.31 = 60339719.98$$ - **Project MAR:** $$NPV = -200000000 + \frac{180000000}{1.115} + \frac{85000000}{1.115^2} + \frac{45000000}{1.115^3}$$ Calculate each term: $\frac{180000000}{1.115} = 161429766.40$ $\frac{85000000}{1.115^2} = 68310768.32$ $\frac{45000000}{1.115^3} = 32262113.49$ Sum: $$NPV = -200000000 + 161429766.40 + 68310768.32 + 32262113.49 = 62735448.21$$ - **Project APR:** $$NPV = -200000000 + \frac{190000000}{1.115} + \frac{60000000}{1.115^2} + \frac{60000000}{1.115^3}$$ Calculate each term: $\frac{190000000}{1.115} = 170510186.80$ $\frac{60000000}{1.115^2} = 48219431.69$ $\frac{60000000}{1.115^3} = 43016151.31$ Sum: $$NPV = -200000000 + 170510186.80 + 48219431.69 + 43016151.31 = 61487169.80$$ 3. **Calculate IRR for each project:** IRR is the rate $r$ where NPV = 0. Solve $-200000000 + \frac{CF_1}{(1+r)} + \frac{CF_2}{(1+r)^2} + \frac{CF_3}{(1+r)^3} = 0$ Approximate IRRs: - Project JAN approx 31.8% - Project FEB approx 29.7% - Project MAR approx 30.5% - Project APR approx 32.7% 4. **Best options based on NPV and IRR:** Sorted by NPV (descending): MAR (62,735,448), JAN (61,494,502), APR (61,487,170), FEB (60,339,720) Sorted by IRR (descending): APR (32.7%), JAN (31.8%), MAR (30.5%), FEB (29.7%) Best two projects by both criteria: - NPV: MAR, JAN - IRR: APR, JAN 5. **Decision if techniques differ:** If NPV and IRR recommend different projects, prefer NPV because it measures value addition directly under the cost of capital. Linda should also consider strategic fit, risk, and resource constraints. **Final answer:** - Best two projects by NPV: PROJECT MAR and PROJECT JAN - Best two projects by IRR: PROJECT APR and PROJECT JAN - Linda should prioritize NPV but consider other business factors if results differ.