Question

Your firm has identified three potential investment projects. The projects and their cash flows are shown below:

Project		Cash Flow Today (millions)		Cash Flow in One Year (millions)
A		-$7		$15
B		$7		$4
C		$19		-$6

Suppose all cash flows are certain and the risk-free interest rate is 9%.

(a) The NPV of Project A is $Answermillion. (Round to two decimal places.)

(b) The NPV of Project B is $Answermillion. (Round to two decimal places.)

(c) The NPV of Project C is $Answermillion. (Round to two decimal places.)

(d) If the firm can choose only one of these projects, which should it choose based on the NPV decision rule?

Project C

Project A

Project B

Cannot tell

(e) If the firm can choose any two of these projects, which should it choose based on the NPV decision rule?

Project A and Project B

Project C and Project B

Project C and Project A

Cannot tell

Answer 1

a.  The NPV of Project A is computed as shown below:

= - $ 7 million + $ 15 million / 1.09

= $ 6.76 million

b. The NPV of Project B is computed as shown below:

= $ 7 million + $ 4 million / 1.09

= 10.67 million Approximately

c. The NPV of Project C is computed as shown below:

= $ 19 million - $ 6 million / 1.09

= $ 13.50 million Approximately

d.  If the firm can choose only one of these projects, it shall choose Project C, since it resulted in the highest NPV. So the correct answer is option of Project C.

e. If the firm can choose any two of these projects, it shall choose Project C and Project B, since the NPV's of these projects are greater than the NPV of project A. So the correct answer is option of Project C and Project B.

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