(Mutually exclusive projects and NPV) You have been assigned the task of evaluating two mutually exclusive projects with the following projected cash flows:
|
Year |
Project A Cash Flow |
Project B Cash Flow |
|
|
0 |
$(102,000) |
$(102,000) |
|
|
1 |
30,000 |
00 |
|
|
2 |
30,000 |
00 |
|
|
3 |
30,000 |
00 |
|
|
4 |
30,000 |
00 |
|
|
5 |
30,000 |
210,000 |
If the appropriate discount rate on these projects is 11 percent, which would be chosen and why?
The NPV of Project B is $nothing.(Round to the nearest cent.)
A:
Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=30,000[1-(1.11)^-5]/0.11
=30,000*3.695897018
=$110,876.91
NPV=Present value of inflows-Present value of outflows
=$110,876.91-$102000
=$8,876.91(Approx)
B:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=210,000/1.11^5
=$124,624.78
NPV=Present value of inflows-Present value of outflows
=$124,624.78-$102000
=$22,624.78(Approx).
Hence B must be selected having higher NPV.
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