Question

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?

Answer 1

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.