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ID is a multi-divisional conglomerate. It uses 10% discount rate (K) to evaluate its holdings. After reviewing Exhibit 1 of preliminary project evaluation, the President has narrowed down to the two best performing projects: Project 7 with $165 NPV and Project 8 with $183 NPV and request the Finance Manager (you) to provide some comparative analysis. Task 1: How sensitive of Projects 7 and 8 to Your answer and interpretation: 20 Marks discount rate changes e.g., how much "K" increase (e.g., if K=11% NPV = 0 then it is 10% increase) would make the project NPV = 0.) Task 2: How much annual inflow decrease in Your answer and interpretation: 20 Marks % term e.g., drop by 5%) will make Projects 7 and 8 NPV = 0 Task 3: AT what discount rate (K) to make Your answer and interpretation: 20 Marks Project 7 NPV = $ 183 Task 4: How much K to increase to make Your answer and interpretation: 20 Marks Project 8 NPV = 165 Task 5: The Project Manager of Project 7 argues Your answer and interpretation: 20 Marks his Project has much shorter Payback period so it should be preferred. As Project Manager of Project 8 provides valid "qualitative" factor on why his Project should be favored. 330 EXHIBIT 1 | Projects' Free Cash Flows (dollars in thousands) Project number: 1 2 3 4 5 6 7 8 Initial investment $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) Year 1 $ 330 $1,666 $ 160 $ 280 $ 2,200 $1,200 $ (350) 2 330 334 200 280 900* (60) 3 330 165 350 280 300 60 4 330 395 280 90 350 5 330 432 280 70 700 6 440" 280 1,200 7 330* 442 280 $ 2,250* 8 $1,000 444 280* 9 446 280 10 448 280 11 450 280 12 451 280 13 451 280 14 452 280 15 $10,000* $(2,000) $ 280 Sum of cash flow benefits $3,310 $2,165 $10,000 $3,561 $4,200 $ 2,200 $2,560 $ 4,150 Excess of cash flow over initial investment $1,310 $ 165 $ 8,000 $1,561 $2,200 $ 200 $ 560 $2,150 Indicates year in which payback was accomplished