Question

"Consider two mutually exclusive projects that will be conducted for a total of 6 years. Project A lasts 3 years (so it will need to be repeated 1 time) and has the following cash flow: Year 0 -$22,000; Year 1 $20,000; Year 2 $18,000; Year 3 $11,000. Project B lasts 2 years (so it will need to be repeated 2 times) and has the following cash flow: Year 0 -$19,000; Year 1 $19,000; Year 2 $23,000. Assume both projects can be repeated with the identical cash flows. The interest rate is 13.8%. Provide the net present worth for 6 YEARS of the project that you should select. If neither project should be selected, enter 0."

Answer 1

Here,

Interest Rate = 13.8%

Cash flow

	Project A	Project B
Year 0	-22000		-19000
Year 1	20000		19000
Year 2	18000		23000	-19000
Year 3	11000	-22000		19000
Year 4		20000		23000	-19000
Year 5		18000			19000
Year 6		11000			23000

SO Present Value

Project A = -22000+20000/(1+.138)+18000/((1+.138)^2)+ 11000/((1+.138)^3)-22000/((1+.138)^3)+20000/((1+.138)^4) +18000/((1+.138)^5)+11000/((1+.138)^6)

NPV of Project A = $28430.61

Project B = -19000+19000/(1+.138)+23000/((1+.138)^2)-19000/((1+.138)^2)+19000/((1+.138)^3)+23000/((1+.138)^4) - 19000/((1+.138)^4)+19000/((1+.138)^5)+23000/((1+.138)^6)

NPV of Project B = $36606.36