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Suppose you have two mutually exclusive projects. Project ABACUS has small cash flows that occur over...

Suppose you have two mutually exclusive projects. Project ABACUS has small cash flows that occur over the next six years. Project CHEWY has no cash flow for 5 years, and 1 very large cash flow in year 6. Why is NPV the best choice for comparing these two projects?

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Given that Project Abacus has cashflows over next six years. Project Chewy has no cashflows till Year 5 and a large cashflow in Year6. As the cashflows are at different time intervals, we need to align the value of cashflows to a particular time period and then evaluate them. NPV is the best choice to compare these two projects, as it calculates the present value of the cashflows by discounting them with required rate of return. By calculating present value of the cashflows, the projects' cashflows will be comparable, and the project will be chosed based on the greater value of NPV.

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