Suppose that you have two possible projects. Project 1 gives a profit of 10 in period...
Suppose that you have two possible projects. Project 1 gives a profit of 10 in period 0 and 9 in period 1. Project 2 gives a profit of 12 in period 0 and 6.5 in period 1. Suppose that the interest rate r = 0.30. Which project is better? (Hint: no matter when you want to consume, higher PDV is always better.)
Homework Answers
R = 30%
Present worth of project 1 = 10 + 9/(1+30%)
Present worth of project 1 = 16.92
Present worth of project 2 = 12 + 6.5/(1+30%)
Present worth of project 2 = 17
Since project 2 has higher present worth than the project 1, so project 2 is better and project 2 should be selected.
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