Question

You are considering the following two projects and can take only one. Your cost of capital is 8%. The cash flows are as follow:

1. Year	0	1	2	3	4
   A	-1000	300	500	300	300
   B	-1000	400	100	500	500

   Which one do you choose?

   	A.	Project B
   	B.	None of them.
   	C.	Project A.

Answer 1

A:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=300/1.08+500/1.08^2+300/1.08^3+300/1.08^4

=1165.11

NPV=Present value of inflows-Present value of outflows

=1165.11-1000

=$165.11(Approx)

B:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=400/1.08+100/1.08^2+500/1.08^3+500/1.08^4

=1220.54

NPV=Present value of inflows-Present value of outflows

=1220.54-1000

=$220.54(Approx).

Hence B must be selected having higher NPV