Question

Please show work or explain to help me understand a little clearer. Thank you!

The State of Ohio is considering the following two mutually exclusive projects (i.e., you can't do both projects) to fund out of its new capital budget. Assuming the State of Ohio has a discount rate of 5% make a recommendation on which project the State should choose and justify the recommendation numerically. (2 points) Project A Project B Year Cash Flow Year Cash Flow -$250,000 -$240,000 $45,000 $5,000 $75,000 $120,000 $95.000 $120,000 $118.000 $72,000 0 0 Aw

Answer 1

The project with higher Net Present value should be done
NPV= Present value of cash inflows - present value of cash outflows
Project A
Year	Cash flows	Discount rate	PV of cash flows
0	-250000	1	(250,000.00)
1	45000	0.952380952	42,857.14
2	75000	0.907029478	68,027.21
3	95000	0.863837599	82,064.57
4	118000	0.822702475	97,078.89
		NPV	40,027.82
Project B
Year	Cash flows	Discount rate	PV of cash flows
0	-240000	1	(240,000.00)
1	5000	0.952380952	4,761.90
2	120000	0.907029478	108,843.54
3	120000	0.863837599	103,660.51
4	72000	0.822702475	59,234.58
		NPV	36,500.53
Since NPV of project A is higher, it should be accepted