Question

Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive?

Project B. Please Show All Work

Answer 1

A:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=32600/1.092+35900/1.092^2+43400/1.092^3

=$93288.17

NPV=Present value of inflows-Present value of outflows

=$93288.17-$87000

=$6288.17(Approx).

B:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=14700/1.127+21200/1.127^2+89800/1.127^3

=$92468.93

NPV=Present value of inflows-Present value of outflows

=$92468.93-$85000

=$7468.93(Approx).

Hence B must be selected having higher NPV.

Answer 2

reject project A and accept project B