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 \$11000. Its projected net cash flows are \$900, \$2000, \$3000, \$4000, and \$5000 at the end of years 1 through 5, respectively. Project B has an initial cost of \$15000, and its projected net cash flows are \$7000, \$5000, \$3000, \$2000, and \$1000 at the end of years 1 through 5, respectively. If the firm’s cost of capital is 6.00%: 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

Mutually exclusive projects are those, out of which only one can be accepted

NPV is better decision creteria while evaluating mutually exclusive projects

NPV = Present value of cash inflows - Present value of cash outflows

= -11000 + 900/(1.06) + 2000/(1.06)^2 + 3000/(1.06)^3 + 4000/(1.06)^4 + 5000/(1.06)^5

=\$1,052.57

Project B = -15000 + 7000/(1.06) + 5000/(1.06)^2 + 3000/(1.06)^3 + 2000/(1.06)^4 + 1000/(1.06)^5

= \$904.06

Project A should be chosen because it has the higher NPV

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