Question

Projects A and B are mutually exclusive and have an initial cost of $82,000 each. Project A provides cash inflows of $34,000 a year for three years while Project B produces a cash inflow of $115,000 in Year 3. Which project(s) should be accepted if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent? A) Accept A at both discount rates B) Accept A at 11.7 percent and neither at 13.5 percent C Accept B at both discount rates D) Accept both at 11.7 percent and neither at 13.5 percent E) Accept B at 11.7 percent and neither at 13.5 percent

Answer 1

We need to calculate the NPV's of the projects:

Year		A		B
0		$ -82,000.00		$   -82,000.00
1		$   34,000.00		$                    -
2		$   34,000.00		$                    -
3		$   34,000.00		$ 1,15,000.00
	NPV @ 11.7	$           85.10		$           516.03
	NPV @ 13.5	$   -2,397.49		$     -3,347.91

As we can see that both NPV are negative at 13.5% and B has a higher NPV at 11.7%, we shall accept B at 11.7% and neithe at 13.5%.

The excel scrrenshot is being provided for better understanding: