Question

(Numbers in parentheses are negative) These two projects are independent. Year Cash Flow of A Cash Flow of B 0 ($5000) ($2000) 1 $1000 $1000 2 $2000 $1000 3 $2000 $2000 4 $2000 $1000 5 $1000 ($1000) Based on the firms' NPV profiles which project should be taken if the required rate of return is 9.5%? Project B because it will raise the value of the firm by the greatest amount based on NPV. Both projects should be taken because in this case we need to evaluate the projects based only on NPV. Project A because it will raise the value of the firm by the greatest amount Both projects should be taken. Neither project should be taken.

Answer 1

We can select both the projects because they have positive NPV'S and both are independent

A B с Year Cash flow A Cash flow B 2 0 -5000 -2000 3 1 1000 1000 4 2 2000 1000 5 3 2000 2000 6 4 2000 1000 7 5 1000 -1000 8 NPV $1,130.95 $1,330.91 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 fx =Npv(9.5%,B3:37)+B2