Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial cash outflow is $50,000 for each project. Project A results in cash inflows of $15,625 at the end of each of the next five years. Project B results in one cash inflow of $99,500 at the end of the fifth year. The required rate of return of Ace Inc. is 10 percent. Ace Inc. should invest in:
a. Project B because it has no cash inflows in the first four years of its life.
b. Project A because it has a positive net present value (NPV).
c. Project B because it has a higher net present value (NPV).
d. Project A because it will generate cash in the initial years of its life.
e. Project A because it will yield cash every year for five years.
Net Present Value = Present Value of Cash Inflows -Present Value of Cash Outflows
Net Present Value =[15625*1/(1.10)^1+15625*1/(1.10)^2+15625*1/(1.10)^3+15625*1/(1.10)^4+15625*1/(1.10)^5]-50,000
= $ 9231.04
Net Present Value= [99500*1/(1.10)^5]-50,000
= $ 11,781.67
Since the projects are mutually exclusive, only one project could be chosen. The project with the higher Net Present value would be selected as it would be more beneficial .
Since Project B has a higher Net Present value, it would be chosen
Answer : c. Project B because it has a higher net present value (NPV).
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