An arts foundation is considering two proposals that have been submitted by its members: Proposal 1: Buy a library of animated film classics for $15 million. The collection has to be restored, at no additional cost, which will take 3 years. In 4 years, film cash flows are expected to be $6 million a year for five straight years.
Proposal 2: Buy modern oil paintings for $1 million and then lease them to museums for $100,000 per year starting in year 1 and continuing for 4 years. In year 5, the paintings would be sold for $2 million.
Compute the NPV and the IRR for each project. Use a required return of 9%. Which proposal is better? Explain your reasoning.