Question

You are considering two mutually exclusive projects. Both projects have an initial cost of $52,000. Project A produces cash inflows of $25,300, $37,100, and $22,000 for years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for years 1 through 3, respectively. The required rate of return is 14.2 percent for Project A and 13.9 percent for Project B. Which project should you accept and why?

Answer 1

Project A is better than Project B because it has a bigger net present value.

Step-by-step explanation:

Giving the following information:

Project A:

Io= -52,000

1= 25,300

2= 37,100

3= 22,000

Project B:

Io= -52,000

1= 43,600

2= 19,800

3= 10,400

The required rate of return is 14.2 percent for Project A and 13.9 percent for Project B.

We need to calculate the Net Present Value of each project.

NPV= -Io + ∑[Cf/(1+i)^n]

Project A:

NPV= - 52,000 + (25,300/1.142) + (37100/1.142^2) + (22000/1.142^3) = 13,372.95

Project B:

NPV= 8,579.62

Project A is better than Project B because it has a bigger net present value.