Will betago invest in both projects

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Project A and B are both available to BetaGo. The initial costs are C0A2A 2B22 = 100 and C0B = 300 for A and B, respectively. Project A alone will generate a cash flowC= 242 at t2, and project B alone will generate a cash flow C = 484 at t. But Aand B are not independent. Indeed, if BetaGo invests in both A and B, it can receive an extra 121 cash flow (the positive externality) at t. The rate of return is 10%.

Problem (a) If BetaGo can invest in either A or B, which one will BetaGo choose? [Hint: if the NPVs of these two projects are same, BetaGo will choose either one.]

Problem (b) If BetaGo can invest in both A and B, will BetaGo invest in both projects?

Reference no: EM132760871

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