Question

2 A $3,000 $3,000 O A company is considering the following projects, The cash flows for four projects are as follows: Investment Year 1 3 4 500 $ 500 $1,000 $3,000 1,000 500 0 0 $3,500 What project is the most valuable? Assuming everything else the same. A, B, C, D, All four investments have equal value

Answer 1

Project B is most valuable.Reason is the amount of investment is same for all four projects and there is equal cash flow of $4000 in all four projects spread over 4 years.Since in case of project B amount is recovered in the year 2 itself in comparison to other options hence project B is better.

If we take any discount rate and discount all the cash flow the net present value of Project B will be higher because it shows the difference of present value of future cash inflows and outflows which will be higher in project B because of early recovery of return from project in comparison to other investment options.