Question

The cost of capital is 15%. Cash flows associated with projects A,B,C,D,E are:

	CF0	CF1	CF2	CF3
A	-100	30	150	70
B	-66	30	50	60
C	-33	40	20	40
D	-66	60	50	30
E	-50	60	50	20

Which projects would you undertake if you have 100 of cash to invest?

Question 7 options:

	A
	B
	C
	D
	E

Answer 1

Rate of interest = 15%

Let us calculate the NPV of each project -

NPV = -CF0 + CF1/(1+i) + CF2/(1+i)² + CF3/(1+i)³

NPV_A = -100 + 30/(1+0.15) + 150/(1+0.15)² + 70/(1+0.15)³ = 85.53

NPV_B = -66 + 30/(1+0.15) + 50/(1+0.15)² + 60/(1+0.15)³ = 37.35

NPV_C = -33 + 40/(1+0.15) + 20/(1+0.15)² + 40/(1+0.15)³ = 43.21

NPV_D = -66 + 60/(1+0.15) + 50/(1+0.15)² + 30/(1+0.15)³ = 43.71

NPV_E = -50 + 60/(1+0.15) + 50/(1+0.15)² + 20/(1+0.15)³ = 53.13

Since, only $100 is available, the following options can be chosen -

Only Project A --> NPV = 85.53

Project B & C --> NPV = 37.35+43.21 = 80.56

Project C & D --> NPV = 43.21+43.71 = 86.92

Project C & E --> NPV = 43.21+53.13 = 96.34

Hence, Projects C and E should be choosen since they give the maximum NPV