Question

The annual incremental cash flows from projects A and B are given below. Both projects have the same discount rate. Using the logic of time value, which of the following is true as long as your discount rate is positive?

Project	Start of Year 1	Start of Year 2	Start of Year 3	Start of Year 4	Start of Year 5	Start of Year 6
A	100	100	100	-100	-100	-100
B	-100	-100	-100	100	100	100

1. Project A is better than project B
2. Project B is better than project A
3. Projects A and B will be of equal value
4. There is not enough information to answer this question.

Answer 1

The future cash flows of both of the projects are same, but the timings of cash flows are different.

In project A, the larger cash flows occurs initially and it implies that the larger cash flows will be discounted by a higher present value factor.

In project B, the larger cash flows occurs later and it implies that the larger cash flows will be discounted by a lower present value factor.

Hence it is clearly implied that the project A will always be better than project B.

So, the correct answer is option a.

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