A company is examining two mutually exclusive projects. Project P requires an immediate investment of $300,000 and produces no profit until the fourth year. Then the expected annual profit is $120,000 for Years 4 to 7 inclusive. Project Q requires an investment of $260,000 now and is expected to generate an annual profit of $55,000 in Years 1 to 7. Neither project has any residual value after seven years.
a) Calculate the IRR of each project to the nearest 0.1%. On the basis of their IRRs, which project is preferred?
b) Which project should be selected if the firm's cost of capital is 10%?
c) Which project should be selected if the firm's cost of capital is 6%?