Ibbotson Inc., a company with expertise in designing Internet-related computer software, is considering two possible capital investments. The first would require an initial investment of $1 million, but is forecast to repay $700,000 each year for two years. The second would require an initial investment of $2 million, but would repay $950,000 per year for three years. The appropriate discount rate (the required return) is 10% per year. Other than these two projects, your firm has no superior investment alternatives. Assume that your goal is to maximize shareholder value. A. Compute the NPV and the IRR for each project. If Ibbotson must choose between the two projects, which should it take? B. The manager who provided the cash flow estimates for the first project argues that the company should invest shareholder capital to obtain the highest possible returns, and he asserts that this is project one. Does his argument alter your assessment of which project is better? Explain.
C. The second proposed project involves rice farming in Thailand. The manager who provided the cash flow forecasts is known to relish the idea of a two-year overseas assignment. The first proposed project involves development of software designed to search the Internet to obtain and compare prices for specified goods. Is this information relevant in choosing among the two projects?