Question

Two government projects have the following benefit profiles:

Project A Project B

Initial Investment Cost 100,000 100,000

Benefits, Year 1 0 40,000

Benefits, Year 2 0 40,000

Benefits, Year 3 80,000 40,000

Benefits, Year 4 80,000 40,000

Which of the following statements is accurate?

a. Because the combined benefits of the two projects over the four years each equals 160,000, the net present value of the projects will be equal.

b. Because the sum of benefits (160,000) exceeds the investment cost (100,000) for both projects, the net present value of both projects will always be positive.

c. The net present value of Project A becomes negative at a higher discount rate than does the net present value of Project B.

d. The net present value of Project B becomes negative at a higher discount rate than does the net present value of Project A.

Answer 1

Option C is aacurate

We have to find the NPV's of two projects at higher discount rates like 50%,25%, 20% randomly.

Formula in EXCEL=NPV(rate,Year1 to year4 cashflows)-Year0 cashflow

For example at 50% Project A, NPV=NPV(50%,Year1 to Year4 cashflows)-100000=-$60494

If you seee at higher discount rates 50%,25%,20%, project A will become higher NPV than the Project B

	Project A	project B
Year0	100000	100000
Year1	0	40000
Year2	0	40000
Year3	80000	40000
Year4	80000	40000
NPV@50%	-60494	-35802
NPV@25%	-26272	-5536
NPV@20%	-15123	3549