Question

   Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent.

initial investment               project a                   project b

                                           $350,000                  $425,000

year                                              cash inflows (cf)

1                                         140,000                  175,000

2                                         165,000                   150,000

3                                          190,000                  125,000

4                                                                         100,000

5                                                                         75,000

6                                                                         50,000

Which project should be chosen on the basis of the normal NPV approach? (See Table 11.11)

		A) Project A because its IRR is higher
		B) Project B because its NPV is higher
		c) Project A because its NPV is higher
		D) Project B because its IRR is higher

Answer 1

Answer: B. Project B because its NPV is higher.
NPV of project A= 56,377.00
NPV of project B = 95,057.50

Project A

Year	Cash flows	PV @ 10%	Discounted cash flows
0	-3,50,000.00	1	-3,50,000.00
1	1,40,000.00	0.9091	1,27,274.00
2	1,65,000.00	0.8264	1,36,356.00
3	1,90,000.00	0.7513	1,42,747.00
			56,377.00

Project B

Year	Cash flows	PV @ 10%	Discounted cash flows
0	-4,25,000.00	1	-4,25,000.00
1	1,75,000.00	0.9091	1,59,092.50
2	1,50,000.00	0.8264	1,23,960.00
3	1,25,000.00	0.7513	93,912.50
4	1,00,000.00	0.6830	68,300.00
5	75,000.00	0.6209	46,567.50
6	50,000.00	0.5645	28,225.00
			95,057.50