Question

rojects A and B are mutually exclusive and have an initial cost of $78,000 each. Project A provides cash inflows of $32,000 a year for three years while Project B produces a cash inflow of $44,400 a year for two years. Which project(s) should be accepted if the discount rate is 10 percent

Answer 1

Project A should be accepted.

Step-by-step explanation:

The initial investment of project A = $78000

The initial investment of project B = $78000

The cash inflows of project A = $32000

The time period for project A = 3 years

The cash inflow of project B = $44400

The time period for project B = 2 years.

Interest rate (r ) = 10%

Now find the net present value of both project and then decide which one has to accept.

The net present value of project A:

`=(A(1-(1+r)^(-n)))/(r) - \text{initial investment} \\= (32000(1-(1+0.1)^(-3)))/(0.1) - 78000 \\= 79579.26 – 78000 \\= $1579.26`

The net present value of project B:

`=(A(1-(1+r)^(-n)))/(r) - \text{initial investment} \\= (44400(1-(1+0.1)^(-2)))/(0.1) - 78000 \\= - 942.14`

Project A should be accepted because project B has a negative net present value.