Suppose your firm is considering two mutually exclusive,
required projects with the cash flows shown below. The required
rate of return on projects of both of their risk class is 9
percent, and that the maximum allowable payback and discounted
payback statistic for the projects are 2 and 3 years,
respectively.
Time: | 0 | 1 | 2 | 3 |
Project A Cash Flow | -21,000 | 11,000 | 31,000 | 2,000 |
Project B Cash Flow | -31,000 | 11,000 | 21,000 | 51,000 |
Use the NPV decision rule to evaluate these projects; which one(s)
should it be accepted or rejected?
Multiple Choice
accept both A and B
accept A, reject B
reject A, accept B
accept neither A nor B
Project A:
NPV = Present value of cash inflows - present value of cash outflows
NPV = -21,000 + 11,000 / (1 + 0.09)^1 + 31,000 / (1 + 0.09)^2 + 2,000 / (1 + 0.09)^3
NPV = -21,000 + 10,091.74312 + 26,092.07979 + 1,544.36696
NPV = $16,728.19
Project B:
NPV = -31,000 + 11,000 / (1 + 0.09)^1 + 21,000 / (1 + 0.09)^2 + 51,000 / (1 + 0.09)^3
NPV = -31,000 + 10,091.74312 + 17,675.27986 + 39,381.35748
NPV = $36,148.38
When projects are mutually exclusive, we can only select 1 project. We should choose the project with highest NPV.
reject A, accept B
Get Answers For Free
Most questions answered within 1 hours.