Question

Cash flow dollars:

Year	Project A	Project B
0	- (106)	- (106)
1	36	55
2	56	55
3	76	55

a.) What is the NPV of each project if the opportunity costs of capital is 2%? (Do not round intermediate calculations. Round your answers to 2 decimal places)

Project A NPV: ??

Project B NPV: ??

a.1 .) Which project to choose?

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- -- - - -- - -- - - - - - - -- - - - - -

B.) What is the NPV of each project if opportunity costs of capital is 12%? (Round 2 decimal places)

Project A NPV: ??

Project B NPV: ??

B. 2.) Which to choose??

Answer 1

a.

Project A:

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

=36/1.02+56/1.02^2+76/1.02^3

=$160.74

NPV=Present value of inflows-Present value of outflows

=$160.74-$106
=54.74(Approx)

B:

Present value of inflows=55/1.02+55/1.02^2+55/1.02^3

=$158.61

NPV =$158.61-$106

=$52.61

Hence A must be chosen having higher NPV.

b.

Project A:

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

=36/1.12+56/1.12^2+76/1.12^3

=$130.88

NPV=Present value of inflows-Present value of outflows

=$130.88-$106
=24.88(Approx)

B:

Present value of inflows=55/1.12+55/1.12^2+55/1.12^3

=$132.10

NPV =$132.10-$106

=$26.10

Hence B must be chosen having higher NPV.