Question

Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive?

Answer 1

PROJECT A

Year Cashflow [email protected]% PV

$ $

0 (87,000) 1 (87,000)

1 32,600 0.9158 29,855

2 35900 0.8386 30,105

3 43,400 0.7679 33,326

NPV 6286

PROJECT B

Year Cashflow [email protected]% PV

$ $

0 (85,000) 1 (85,000)

1 14,700 0.8873 13,043

2 21.200 0.7873 16,691

3 89,800 0.6986 62,734

NPV 7,468

Project B should be accepted because it has the higher NPV

Step-by-step explanation:

In obtaining the net present value, there is need to discount the cashflow for each year at the required rate of return of each project. The discount factor can be calculated as (1+r)n. Thereafter, the net present value is computed as the difference between the present value of cashflow and initial outlay.