Question

A manufacturing firm is considering two mutually exclusive alternatives given below. The net cash flows in dollars for years 0 through 2 for Project A is:
-4,000
3,300
3,000
The net cash flow in dollars for years 0 through 2 for Project B is:
-6,400
4,400
4,200
Determine which project is a better choice if MARR = 11%, or if neither project should be chosen.

Answer 1

Calculate net present worth of Project A -

NPW = -4000 + 3300(P/F, 11%, 1) + 3000(P/F, 11%, 2)

NPW = -4000 + (3300 * 0.9009) + (3000 * 0.8116)

NPW = -4000 + 2972.97 + 2434.8

NPW = 1407.77

The net present worth of Project A is $1,407.77

Calculate the net present worth of Project B -

NPW = -6400 + 4400(P/F, 11%, 1) + 4200(P/F, 11%, 2)

NPW = -6400 + (4400 * 0.9009) + (4200 * 0.8116)

NPW = -6400 + 3936.96 + 3408.72

NPW = 972.68

The net present worth of project B is $972.68

The net present worth of Project A is numerically higher.

So, Project A is a better choice.