Final answer:
To determine which projects should be accepted at different cost of capital rates, we calculate the internal rate of return (IRR) for each project. At a cost of capital of 15%, Project A should be accepted while Project B should not. At a cost of capital of 10%, both Project A and Project B should be accepted.
Step-by-step explanation:
a. To determine whether to accept Project A or Project B at a cost of capital of 15%, we need to calculate the internal rate of return (IRR) for each project. The IRR is the discount rate at which the present value of the cash inflows equals the initial investment. For Project A, the cash inflows are $40,000 per year for 4 years. Using the IRR formula, we find that the IRR for Project A is approximately 16.67%. Therefore, Project A should be accepted since its IRR is greater than the cost of capital. Now let's calculate the IRR for Project B. The cash inflows for Project B are $25,000 per year for 5 years. By using the IRR formula, we find that the IRR for Project B is approximately 12.61%. Since the IRR for Project B is less than the cost of capital, it should not be accepted at a cost of capital of 15%. b. At a cost of capital of 10%, the decision on which projects to accept would be different. The IRR for Project A is still 16.67%, which is greater than 10%. Therefore, Project A should still be accepted at this lower cost of capital. The IRR for Project B is now approximately 14.47%, which is also greater than 10%. Therefore, at a cost of capital of 10%, both Project A and Project B should be accepted.