Question

Projects A and B both have an initial outflow of $100,000. Project A will return a cash flow of $30,000 each year for the next 5 years. Project B will return $40,000 in year 1, $30,000 in year 2, $30,000 in year 3, $30,000 in year 4, and $20,000 in year 5. Which project will have the higher net present value

Answer 1

This question is incomplete. The discount rate was not given. Thus, a discount rate of 10% is assumed.

PROJECT A

Year Cashflow DF@10% PV

$ $

0 (100,000) 1 (100,000)

1 30,000 0.9091 27,273

2 30,000 0.8264 24,792

3 30,000 0.7513 22,539

4 30,000 0.6830 20,490

5 30,000 0.6209 18,627

NPV 13,721

PROJECT B

Year Cashflow DF@10% PV

$ $

0 (100,000) 1 (100,000)

1 40,000 0.9091 36,364

2 30,000 0.8264 24,792

3 30,000 0.7513 22,539

4 30,000 0.6830 20,490

5 20,000 0.6209 12,418

NPV 16,603

Product B has a higher NPV

Step-by-step explanation:

In this case, we will discount the cashflows for each year at 10%. Then, we will determine the present value of cash inflows by multiplying the cash inflows by discount factor. Thereafter, we will deduct the initial outlay from the present value of cash inflows so as to obtain the net present value.