Question

Frazier Fudge, Inc. is considering 2 mutually exclusive projects with the following cash flows. Which project should be accepted? Assume a cost of capital of 10%.

Years	Project X	Project Y
0	($350)	($350)
1	$130	$200
2	$150	$120
3	$180	$120

a.	Project X because NPV is $27.4
b.	Project Y because NPV is $31
c.	Project X because IRR is 13.7%
d.	Project Y because IRR is 12.2%

Answer 1

X:

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

=130/1.1+150/1.1^2+180/1.1^3

=$377.39

NPV=Present value of inflows-Present value of outflows

=$377.39-$350

=$27.4(Approx).

Y:

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

=200/1.1+120/1.1^2+120/1.1^3

=$371.15

NPV=Present value of inflows-Present value of outflows

=$371.15-$350

=$21.15(Approx).

Hence X must be selected having higher NPV.(option A).