Question

A company has the option to invest in project A, project B, or neither (Assume the...

A company has the option to invest in project A, project B, or neither (Assume the projects are mutually exclusive and the company has no other investment options, meaning the company can only invest in one of the two projects or nothing at all).

Project A requires an initial investment of $120,000 today and provides cash flows of $35,000 a year for five years. The project will also return back $20,000 in capital in year six.

Project B requires a $130,000 investment today and will have cash flows of $40,000 a year for 5 years.

The firm’s hurdle rate for these projects is 8%. Which project should be selected?

A: Project A

B: Project B

C: Neither Project A or B

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Answer #1

Correct answer: A: Project A

Project A should be selected because Project A has higher net present value (NPV)

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

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