Question

# You are considering two independent projects. The required rate of return is 13.75 percent for Project...

You are considering two independent projects. The required rate of return is 13.75 percent for Project A and 14.25 percent for Project B. Project A has an initial cost of \$51,400 and cash inflows of \$21,400, \$24,900, and \$22,200 for Years 1 to 3, respectively. Project B has an initial cost of \$38,300 and cash inflows of \$18,000 a year for 3 years. Which project(s), if any, should you accept?

 A. Reject both Projects. B. Accept both projects. C. Accept Project B and reject Project A. D. Accept project A and reject Project B.

A:

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

=21400/1.1375+24900/1.1375^2+22200/1.1375^3

=\$53140.62

NPV=Present value of inflows-Present value of outflows

=\$53140.62-\$51400

=\$1740.62(Approx).

B:

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

=18000[1-(1.1425)^-3]/0.1425

=18000*2.311927582

=\$41614.70

NPV=Present value of inflows-Present value of outflows

=\$41614.70-\$38300

=\$3314.70(Approx).

Hence since both projects have positive NPV and are independent;both must be selected.(Option B).

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