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 a 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?

Answer 1

Project B should be accepted.

Step-by-step explanation:

Giving the following information:

Project A:

Io= -$284,700

Year 1= $75,900

Year 2= $106,400

Year 3= $159,800

Project B:

Io= -$115,000

Year 1= $50,000

Year 2= $50,0000

Year 3= $50,000

Discount rate= 11%

To calculate the convenience of each project, we need to calculate the Net Present Value (NPV). If the NPV is positive, the project increases the value of the company.

NPV= -Io + ∑[Cf/(1+i)^n]

Cf= cash flow

Project A:

NPV= -284,700 + 75,900/1.11 + 106,400/1.11^2 + 159,800/1.11^3

NPV= -13,120.61

Project B:

NPV= -$115,000 + 50,000/1.11 + 50,000/1.11^2 + 50,000/1.11^3

NPV= 7,185.74

Project B should be accepted.