Question

# YEAR   PROJECT A CASH FLOW   PROJECT B CASH FLOW 0 -110,000 -110,000 1 30,000 0 2...

YEAR   PROJECT A CASH FLOW   PROJECT B CASH FLOW
0 -110,000 -110,000
1 30,000 0
2 30,000 0
3 30,000 0
4 30,000 0
5 30,000 230,000

(Mutually exclusive projects and NPV​) You have been assigned the task of evaluating two mutually exclusive projects with the following projected cash​ flows: If the appropriate discount rate on these projects is 12 ​percent, which would be chosen and​ why?

A:

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=\$30,000[1-(1.12)^-5]/0.12

=\$30,000*3.604776202

=\$108,143.29

NPV=Present value of inflows-Present value of outflows

=\$108,143.29-\$110,000

=(\$1856.71)(Approx)(Negative).

B:

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

=230,000/1.12^5

=230,000*0.567426855

=\$130508.18

NPV=Present value of inflows-Present value of outflows

=\$130508.18-\$110,000

=\$20508.18(Approx).

Hence B must be selected having higher and positive NPV.

#### Earn Coins

Coins can be redeemed for fabulous gifts.