Question

you are considering two independent projects with the same discount rate of 11 percent. project a costs $284,700 and has cash flows of $75,900, $106,400, and $159,800 for years 1 to 3, respectively. project b costs $115,000, and has a cash flow of $50,000 per year for years 1 to 3. you have sufficient funds to finance any decision you make. which project or projects, if either, should you accept and why? neither project; because their npvs are less than their initial costs project a; because it has the larger npv project a; because it is the larger-sized project with a positive irr both projects; because their npvs are both positive project b; because its irr exceeds the discount rat

Answer 1

To decide which project to accept, calculate the NPV of each by discounting their future cash flows at the 11 percent discount rate and subtract the initial investment. If both projects have positive NPVs, they should be accepted, otherwise not. Choose the project with the higher positive NPV if applicable.

Step-by-step explanation:

The student's question revolves around the evaluation of two independent projects using the concept of Net Present Value (NPV) and considering the same discount rate of 11 percent. To determine which project or projects should be accepted, we need to compute their NPVs. The NPV is the sum of the present values of incoming cash flows minus the initial investment.

To calculate the NPV of each project, we discount their future cash flows back to their present value using the given discount rate of 11 percent and subtract the initial investment costs. For Project A, the cash flows are $75,900, $106,400, and $159,800 for years 1 to 3, respectively, with an initial cost of $284,700. For Project B, the cash flows are $50,000 per year for years 1 to 3, with an initial cost of $115,000.

If both projects have positive NPVs, then they both should be accepted as they are expected to add value to the company. If one or both have negative NPVs, then they should not be accepted. To make the decision simpler, if one project has a higher NPV than the other, and they both are positive, it would make sense to choose the project with the higher NPV as it would add more value.