Question

PQR Co., has identified the following two mutually exclusive projects. Both have a required rate of return of 15 percent. Which project should PQR accept?

Year	Cash Flow For A	Cash Flow for B
0	-145,452	-334,695
1	51,702	116,155
2	60,519	156,294
3	65,182	132,744
4	36,802	95,598

Answer 1

A:

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

=51,702/1.15+60,519/1.15^2+65,182/1.15^3+36,802/1.15^4

=154619.21

NPV=Present value of inflows-Present value of outflows

=154619.21-145,452

=9167.21(Approx)

B:

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

=116,155/1.15+156,294/1.15^2+132,744/1.15^3+95,598/1.15^4

=361124.87

NPV=Present value of inflows-Present value of outflows

=361124.87-334,695

=26429.87(Approx)

Hence since projects are mutually exclusive;Project B must be selected only having higher NPV.