Question

Consider two projects with the following cash flows: Project S is a 4 year project with initial (time 0) cash outflow of 3000 and time 1 through 4 cash inflows of 1500, 1200, 800 and 300 respectively. Project L is a 4 year project with initial (time 0) cash outflow of 3000 and time 1 through 4 cash inflows of 400, 900, 1300, and 1500 respectively. Assuming a 5% cost of capital, determine which project should be chosen if the projects are mutually exclusive.

Answer 1

Project L has higher NPV than Project S, therefore Project L should be selected

Step-by-step explanation:

Project S:

Year 0 : (3000)

Year 1 : 1500 * 0.952 = 1,428

Year 2 : 1200 * 0.907= 1,088.4

Year 3 : 800 * 0.864= 691.2

Year 4 : 300 * 0.823= 246.9

Total of Cash inflows after discounting: 3,454.5

Net Present Value : 454.5

Project L:

Year 0 : (3000)

Year 1 : 400 * 0.952 =380.8

Year 2 : 900 * 0.907 = 816.3

Year 3 : 1300 * 0.864 = 1,123.2

Year 4 : 1500 * 0.823 = 1,234.5

Total of Cash inflows after discounting: 3,554.8

Net Present Value : 554.8