A3 5 g 5. We have two independent and mutually exclusive projects, A and B. Project A requires an initial investment of $1500, and will yield $800 of cash inflows for the next three years. Project B...

A3 5 g

5. We have two independent and mutually exclusive projects, A and B. Project A requires an initial investment of $1500, and will yield $800 of cash inflows for the next three years. Project B requires an initial investment of $5000, and will yield $1,500 of cash inflows for the next five years. The required return on each project is 10%.

The cash flows and required return given are all in nominal terms. Given that the inflation rate is 3%, answer the following questions:

g.       Which project should be chosen based on the real cash flows and real rate of return?