Question

**You are considering the following two mutually
exclusive projects. Both projects will be depreciated using
straight-line depreciation to a zero book value over the life of
the project. Neither project has any salvage
value.**

**Project A**

Year | Cash Flow |

0 | -$75,000 |

1 | $19,000 |

2 | $48,000 |

3 | $12,000 |

**Project B**

Year | Cash Flow |

0 | -$70,000 |

1 | $10,000 |

2 | $16,000 |

3 | $72, 000 |

Required rate of return 10% 13%

Required payback period 2.0 years 2.0 years

Based on the net present value method of analysis and given the information in the problem, you should:

A. accept both project A and project B.

B. accept project A and reject project B.

C. accept project B and reject project A.

D. reject both project A and project B.

E. accept whichever one you want as they represent equal opportunities.

Answer #1

**The NPV of the project is computed as shown
below:**

**= Initial investment + Present value of future cash
flows**

**So, the NPV of project A is computed as
follows:**

= - $ 75,000 + $ 19,000 / 1.10 + $ 48,000 / 1.10^{2} + $
12,000 / 1.10^{3}

**= - $ 9,042.07 Approximately**

**The NPV of project B is computed as
follows:**

= - $ 70,000 + $ 10,000 / 1.13 + $ 16,000 / 1.13^{2} + $
72,000 / 1.13^{3}

**= $ 1,279.52 Approximately**

**Since the NPV of project A is negative. Hence only
Project B shall be accepted.**

**So, the correct answer is option c.**

Feel free to ask in case of any query relating to this question

You are considering the following two
mutually exclusive projects with the following cash flows:
Project
A
Project B
Year Cash
Flow
Year Cash Flow
0
-$75,000
0 -$70,000
1
$19,000
1 $10,000
2
$48,000
2 $16,000
3
$12,000
3 $72,000
Required rate of
return
10
%
13 %
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Time:
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1
2
3
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400
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Time
0
1
2
3
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?1,000
300
400
700
Project B Cash Flow
?500
200
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300
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0
1
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3
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300
400
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