Question

61 a) Now think about how you would COMPATE the following MUTUALLY EXCLUSIVE projects i' your required return for both is You moy use any method thot you'd lke to solve this, Show your work and explain your reasoning 9 Project 1 10 (5.0) Time Period Expected Cash Flows 01 10.0 100 100 10.0 (50.0) 10.0 10.0 10.0 3 Project 1 4 Time Period 10 4.0 4.0 4.0 4.0 4.0 4.0 Expected Cash Flows (25.0) 4.0 Your Solution 17 18 20 21 23 124 125 126 127 128 129 130

Answer 1

Here I will use the NPV (net present value) method and the project with the higher NPV will be selected.

Calculations:

Project 1
Time period	Cash flow	1+r	PVIF	PV
0	-50.00	1.0600	1.0000	-50.00
1	10.00		0.9434	9.43
2	10.00		0.8900	8.90
3	10.00		0.8396	8.40
4	10.00		0.7921	7.92
5	10.00		0.7473	7.47
6	10.00		0.7050	7.05
7	10.00		0.6651	6.65
8	10.00		0.6274	6.27
9	10.00		0.5919	5.92
10	-5.00		0.5584	-2.79
			NPV	15.22
Project 2
Time period	Cash flow	1+r	PVIF	PV
0	-25.00	1.0600	1.0000	-25.00
1	4.00		0.9434	3.77
2	4.00		0.8900	3.56
3	4.00		0.8396	3.36
4	4.00		0.7921	3.17
5	4.00		0.7473	2.99
6	4.00		0.7050	2.82
7	4.00		0.6651	2.66
8	4.00		0.6274	2.51
9	4.00		0.5919	2.37
10	-2.00		0.5584	-1.12
			NPV	1.09

As we can see that NPV of project 1 is higher and hence project 1 should be selected.