Question

You have been assigned the task of evaluating two mutually exclusive projects with the following projected...

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

​$(110,000​)

​$(110,000​)

1

   30,000

           00
2

   30,000

           00

3

   30,000

           00

4

   30,000

           00

5

  30,000

  230,000

If the appropriate discount rate on these projects is

8​%,

which would be chosen and​ why?

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Homework Answers

Answer #1

A:

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

=30,000/1.08+30,000/1.08^2+30,000/1.08^3+30,000/1.08^4+30,000/1.08^5

=119781.30

NPV=Present value of inflows-Present value of outflows

=119781.30-110,000

=$9781.3(Approx)

B:

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

=230,000/1.08^5

=156534.14

NPV=Present value of inflows-Present value of outflows

=156534.14-110,000

=$46534.14(Approx)

Hence since projects are mutually exclusive;Project B must be selected only having higher net present value.

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