Question

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively. Time: 0123 Project -35,000 25,000 45,000 16,000 A Cash Flow Project -45,000 25,000 35,000 B Cash Flow Use the NPV decision rule to evaluate these projects; which one(s) should it be accepted or rejected? Multiple Choice reject A, accept B accept both A and B

Answer 1

Given required rate of return = 8% Project A- NPV = present value of inflows (-) present value of outflows 16000 25000 1.08 45000 [1.0872 - 35,000 [1-08) 2 PV of year! inflow Outflow PV of year 2 inflow PV of years inflow = (23,148 + 38,580 + 12,701) – 35,000 = 39, 429 Project B NPV Present value of inflows (-) present value of outflows | 25000 + 35,000 1 1.08 (108) ² 65,000 (108)3 | - 45,000 = [23,148 + 30,007 + 51,599) - 45,000 = 59,754

since, NPV of both the projects are positive. It is viable to accept both the projects. Therefore, answer is accept both A and B. I Thank you for giving me the oppurtunity and feel free to ask any query if you have regarding the solution)