Question

The company has to choose between to mutually exclusive projects, Project A and Project B. Which project (s) should the company implement if they have a 10% required rate of return?

Year	Project A	Project B
0	$-50,000	$-10,000
1	$20,000	$5,000
2	$20,000	$5,000
3	$10,000	$2,000
4	$10,000	$2,000
5	$5000	$1500

Question 8 options:

	Only A
	Only B
	A & B
	Neither A nor B

Answer 1

Net Present Value for Project A = $ 2,158.63

Net Present Value for Project B = $ 2,477.72

Since the projects are mutually exclusive projects, only one project can be accepted. Since, the Net Present Value of project B is higher than that of Project A, the Project B must be accepted.

Hence the correct answer is Project B

Note:

Net Present Value for Project A = $ 20000 * 1/(1.10) ^ 1 + $ 20000 * 1/(1.10) ^2 +$ 10000 * 1/(1.10) ^3 + $ 10000* 1/(1.10) ^4 + $ 5000 * 1/(1.10) ^5

= $ 2,158.63

Net Present Value for Project B : $ 5000 * 1/(1.10) ^ 1 + $ 5000 * 1/(1.10) ^2 +$ 2000* 1/(1.10) ^3 + $ 2000* 1/(1.10) ^4 + $ 1500* 1/(1.10) ^5

= $ 2,477.72