Question

# Two mutually exclusive projects have an initial cost of \$12,000. Project A produces cash inflows of...

Two mutually exclusive projects have an initial cost of \$12,000. Project A produces cash inflows of \$10,200, \$8,700, and \$3,500 for years 1 through 3 respectively. Project B produces cash inflows of \$6,700, \$3,500, and \$12,600 for years 1 through 3 respectively. The required rate is 10 percent. which project would you choose to invest in and why?

When projects are mutually exclusive, we should choose the project which has the highest NPV

Project A:

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

NPV = -12,000 + 10,200 / (1 + 0.1)^1 + 8,700 / (1 + 0.1)^2 + 3,500 / (1 + 0.1)^3

NPV = -12,000 + 9,272.7273 + 7,190.0826 + 2,629.6018

NPV = \$7,092.41

Project B:

NPV = -12,000 + 6,700 / (1 + 0.1)^1 + 3,500 / (1 + 0.1)^2 + 12,600 / (1 + 0.1)^3

NPV = -12,000 + 6,090.9091 + 2,892.56198 + 9,466.56649

NPV = 6,450.04

Project A should be accepted as it has the highest NPV

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