Question

Suppose a company has two mutually exclusive projects, both of which are three years in length. Project A has an initial outlay of $7,000 and has expected cash flows of $3,000 in year 1, $4,000 in year 2, and $4,000 in year 3. Project B has an initial outlay of $10,000 and has expected cash flows of $2,000 in year 1, $4,000 in year 2, and $5,000 in year 3. The required rate of return is 12% for projects at this company. What is the net present value for the best project? (Answer to the nearest dollar.)

Answer 1

A:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=3000/1.12+4000/1.12^2+4000/1.12^3

=8714.47

NPV=Present value of inflows-Present value of outflows

=8714.47-7000

=$1714.47(Approx)

B:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=2000/1.12+4000/1.12^2+5000/1.12^3

=8533.39

NPV=Present value of inflows-Present value of outflows

=8533.39-10,000

=-1466.61(Approx)(Negative)

Hence net present value of Project A=$1714(Approx)