Genovese, Capone and Lansky, Inc., a small importer of virgin olive oil in the Chicago area, has two possible investment opportunities. The first is to expand in an area already being developed by the company. The expansion bribes to local officials, cement, bullets, legal and accounting fees, bribes to state officials, dead fish, old newspaper, white ties, spaghetti sauce, bribes to federal officials, wine, bullet proof cars, etc.) is expected to cost $498,000,000. As expenses of this size require two signatures, Ralphie "The Terminator" Franconi has called in his administrative assistant Vinnie "The Calculator" Melillo. Mr Melillo, a recent graduate of the Harvard Business School, also called in his father, Gennaro "The Slide Rule" Melillo, for some additional advice. After considerable time and effort, and the help of their "Big 6" outside auditors, they were able to arrive at a cash flow estimate. The accountants were a little confused as to how all that money was going to come from an operation that imported only 12 cases of olive oil in all of 1996. They were told to make believe it was 1985 and they were auditing an S & L - close their eyes, collect their fees and keep their mouths shut. They determined that the net cash inflows are expected to be $211,900,000 per year over the life of the project, which is 6 years. The other opportunity is to develop a relatively little known area of South Texas, the city of San Antonio. They believe growth resulting from NAFTA will create many opportunities in San Antonio. Due largely to the lower cost of bribing local officials, the project will cost only $315,000,000 and have net cash inflows of $152,540,000 per year for 6 years. Even with the political unrest in Chicago, Genovese, Capone and Lansky, Inc. realizes that it will be more risky to develop the property in South Texas due to the greater political instability of the area. The firm's executive committee, chaired by Guido "Boom Boom" Mezanotti, has assigned a risk adjusted discount rate of 32% to the South Texas project and 28% to the Chicago project since it believes that the Chicago project is less risky). However, due to the level of political unrest in both of the areas, and the growing movement toward term limitations in Chicago and the adoption of term limitations in San Antonio, management is unwilling to assign salvage values to either of the projects. Which project should Genovese's management accept if it can accomplish only one project out of this month's cash flows?

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The Answer of Genovese, Capone and Lansky, Inc., a small importer of virgin olive oil in the Chicago area, has two possible investment opportunities. The first is to expand in an area already being developed by the company. The expansion bribes to local officials, cement, bullets, legal and accounting fees, bribes to state officials, dead fish, old newspaper, white ties, spaghetti sauce, bribes to federal officials, wine, bullet proof cars, etc.) is expected to cost $498,000,000. As expenses of this size require two signatures, Ralphie "The Terminator" Franconi has called in his administrative assistant Vinnie "The Calculator" Melillo. Mr Melillo, a recent graduate of the Harvard Business School, also called in his father, Gennaro "The Slide Rule" Melillo, for some additional advice. After considerable time and effort, and the help of their "Big 6" outside auditors, they were able to arrive at a cash flow estimate. The accountants were a little confused as to how all that money was going to come from an operation that imported only 12 cases of olive oil in all of 1996. They were told to make believe it was 1985 and they were auditing an S & L - close their eyes, collect their fees and keep their mouths shut. They determined that the net cash inflows are expected to be $211,900,000 per year over the life of the project, which is 6 years. The other opportunity is to develop a relatively little known area of South Texas, the city of San Antonio. They believe growth resulting from NAFTA will create many opportunities in San Antonio. Due largely to the lower cost of bribing local officials, the project will cost only $315,000,000 and have net cash inflows of $152,540,000 per year for 6 years. Even with the political unrest in Chicago, Genovese, Capone and Lansky, Inc. realizes that it will be more risky to develop the property in South Texas due to the greater political instability of the area. The firm's executive committee, chaired by Guido "Boom Boom" Mezanotti, has assigned a risk adjusted discount rate of 32% to the South Texas project and 28% to the Chicago project since it believes that the Chicago project is less risky). However, due to the level of political unrest in both of the areas, and the growing movement toward term limitations in Chicago and the adoption of term limitations in San Antonio, management is unwilling to assign salvage values to either of the projects. Which project should Genovese's management accept if it can accomplish only one project out of this month's cash flows?