Question

Lithium, inc. is considering two mutually exclusive projects, a and

b. project a costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. project b costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. the firm's required rate of return for these projects is 10%. the net present value for project a is

Answer 1

Missing question: Which project should be implemented based on net present value?

Solution:
NPV = -Co + C1/(1+r) + C2/(1+r)^2 + ... + Cn/(1+r)^n

Project A
NPV = -95000 + 65000/(1+0.1) + 75000/(1+0.1)^2 = $26,074.38

Project B
NPV = -120000+ 64000/(1+0.1) + 67000/(1+0.1)^2 + 56000/(1+0.1)^3 + 45000/(1+0.1)^4 = $66,362.95

The rule: The project with higher NPV is chosen for implementation. Based on the NPVs calculated, project B is the most viable.