Final answer:
To determine which project to accept between A and B at discount rates of 5% and 11%, NPV calculations are necessary for each project at both rates. The project with the higher NPV at a given discount rate is the better choice, as higher discount rates reduce the present value of future cash flows. The choice varies with the discount rate due to the associated opportunity cost and interest rate risk.
Step-by-step explanation:
The question involves comparing two mutually exclusive projects to decide which one to accept based on their Net Present Value (NPV) at different discount rates. To determine which project to accept, we'll calculate the NPV of both projects A and B using the discount rates of 5% and 11%. NPV calculations will help in understanding the value of future cash flows in today's dollars, accounting for the discount rate and interest rate risk.
When the discount rate is 5%, we will compute the present value of the cash flows for each year and sum them up for both projects. Then, we'll compare the NPVs: If Project A has a higher NPV than Project B, we accept Project A; if not, we accept Project B.
Additionally, we'll repeat the process at an 11% discount rate. The changes in NPV with a higher discount rate will reflect the reduced present value of future cash flows, as the increased opportunity cost makes those future dollars less valuable today.
Without actual NPV calculations provided here, we cannot determine which project to accept at a 5% or 11% discount rate. However, the principle of NPV and the effect of discount rates on investment value will guide the correct choice.
It's important to remember the present discounted value concept, which allows us to equate future money with its current value, adjusting for the opportunity cost of capital, which is exactly what NPV does in investment decision-making.