Question

Consider the following two mutually exclusive projects: Click the icon to view the interest factors for discrete compounding when i=19% per year. (a) At an interest rate of 19%, which project would you recommend choosing? The present worth of Project A is $. (Round to the nearest cent.) The present worth of Project A is $ Cus . (Round to the nearest cent.) The present worth of Project B is $ (Round to the nearest cent.) Which project should be selected? Choose the correct answer below. Project B Project A The discounted payback period of Project A is 0 yoar(s). (Round up to the nearest whole numbet.) The discountad paybeck period of Project B is d year(s) (Round up to the nearest whole number)

Answer 1

To make informed decisions between two mutually exclusive projects, one must calculate the present value of each project using a given discount rate, with the project having the higher present value being the preferred choice. This method accounts for the time value of money and the interest rate risk associated with future cash flows.

Step-by-step explanation:

When evaluating mutually exclusive projects with different cash flows, it's essential to calculate the present value (PV) of each project's expected cash flows using the discount rate.

The project with the higher present value should generally be selected because it implies a greater value in today's terms, taking into account the time value of money. To calculate the present value, one would typically use a financial calculator or spreadsheet software with a constant discount rate and cash flows for each period.

For instance, if Project A is expected to yield $1,000 every year for 10 years, and Project B is expected to yield $500 every year for 15 years, using a discount rate of 19%, you would calculate the present value for each year's cash flow and add them up to get the total present value for each project.

The project with the highest total present value is the one that should be selected. Additionally, the discounted payback period is the time it takes for the initial investment to be paid back in terms of discounted cash flows. In a scenario where interest rates rise, the present value of future payments would decrease, hence the importance of considering the current market rate for discounting future payments.