Question

# A firm must choose between two mutually exclusive projects, A & B. Project A has an...

A firm must choose between two mutually exclusive projects, A & B. Project A has an initial cost of \$10000. Its projected net cash flows are \$800, \$2000, \$3000, \$4000, and \$5000 at the end of years 1 through 5, respectively. Project B has an initial cost of \$14000, and its projected net cash flows are \$7000, \$5000, \$3000, \$2000, and \$1000 at the end of years 1 through 5, respectively. The firm’s cost of capital is 6.00%. Choose the correct statement:

 Project B should be chosen because it has the higher IRR Project B should be chosen because it has the higher NPV Project A should be chosen because it has the higher IRR Project A should be chosen because it has the higher NPV Both projects should be chosen because both have a positive NPV

NPV = Present Value of cash Inflows - Present Value of cash Outflows

NPV of Project A = [800*1/(1.06)^1+2000*1/(1.06)^2+3000*1/(1.06)^3+4000*1/(1.06)^4+5000*1/(1.06)^5]-10000

= \$ 1,958.23

NPV of Project B = [7000*1/(1.06)^1+5000*1/(1.06)^2+3000*1/(1.06)^3+2000*1/(1.06)^4+1000*1/(1.06)^5]-14000

= \$ 1,904.06

When a decision has to be made between two mutually exclusive projects, only one project can be chosen and the the project with the higher NPV is chosen.

Hence, Project A would be chosen

Answer = Project A should be chosen because it has the higher NPV

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