Question

Two mutually exclusive projects have an initial cost of $60,000 each. Project A produces cash inflows of $30,000, $27,000, and $20,000 for Years 1 through 3, respectively. Project B produces cash inflows of $80,000 in Year 2 only. The required rate of return is 10 percent for Project A and 11 percent for Project B. Which project(s) should be accepted and why

Answer 1

Project B

Step-by-step explanation:

The computation of the net present value is shown below:

For project A

(in dollars) (in dollars)

Year Cash flows Discount factor at 10% Present value

0 -60000 1 -60000.00 (A)

1 30000 0.9090909091 27272.73

2 27000 0.826446281 22314.05

3 20000 0.7513148009 15026.30

Total present value 64613.07 (B)

Net present value 4613.07 (B - A)

For project B

(in dollars) (in dollars)

Year Cash flows Discount factor at 11% Present value

0 -60000 1 -60000.00 (A)

1 0 0.9009009009 0

2 80000 0.8116224332 64929.79

3 0 0.7311913813 0

Total present value 64929.79 (B)

Net present value 4929.79 (B - A)

As we can see that project B has high net present value as compared with project A so project B should be accepted