Question

The following are the cash flows of two independent projects: Year Project A Project B 0...

The following are the cash flows of two independent projects:

Year Project A Project B
0 $ (230 ) $ (230 )
1 110 130
2 110 130
3 110 130
4 110

a. If the opportunity cost of capital is 11%, calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. Which of these projects is worth pursuing?

  • Project A

  • Project B

  • Both

  • Neither

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Homework Answers

Answer #1

Project A:

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

=110/1.11+110/1.11^2+110/1.11^3+110/1.11^4

=341.27

NPV=Present value of inflows-Present value of outflows

=341.27-230

=$111.27(Approx)

Project B:

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

=130/1.11+130/1.11^2+130/1.11^3

=317.68

NPV=Present value of inflows-Present value of outflows

=317.68-230

=$87.68(Approx)

Hence since projects are independent;both projects must be chosen having positive NPV.

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