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 inflowsPresent 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 inflowsPresent 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).
Get Answers For Free
Most questions answered within 1 hours.