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Two projects being considered are mutually exclusive and have the following cash flows: Year Project A...

  1. Two projects being considered are mutually exclusive and have the following cash flows:

Year

Project A

Project B

0

-$50,000

-$50,000

1

   15,000

0

2

   15,000

0

3

   15,000

0

4

   15,000

0

5

   15,000

99,000

If the required rate of return on these projects is 10 percent, which would be chosen and why?

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Homework Answers

Answer #1

Mutually exclusive refers to a set of projects out of which only one project can be accepted.
We can determine the net present values (NPV) of the projects using excel as:


So, the NPV of project A is $6861.80 and NPV of project B is $11471.21.

The project with higher value of NPV should be accepted because higher value of NPV will increase the shareholders' value by higher amount.
Answer: Hence, project B should be accepted.

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