Question

You have been assigned the task of evaluating two mutually exclusive projects with the following projected cash​ flows:If the appropriate discount rate on these projects is 11 ​percent, which would be chosen and​ why?

YEAR   PROJECT A CASH FLOW   PROJECT B CASH FLOW
0   -105,000   -105,000
1   37,000   0
2   37,000   0
3   37,000   0
4   37,000   0
5   37,000   230,000

Answer 1

A:

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$37000[1-(1.11)^-5]/0.11

=$37000*3.695897018

=$136,748.19

NPV=Present value of inflows-Present value of outflows

=$136,748.19-$105000

=$31,748.19(Approx).

B:

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

=230,000/1.11^5

=$136,493.81

NPV=Present value of inflows-Present value of outflows

=$136,493.81-$105000

=$31,493.81(Approx).

Hence A must be selected having higher NPV.