Question

Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial cash outflow is $50,000 for each project. Project A results in cash inflows of $15,625 at the end of each of the next five years. Project B results in one cash inflow of $99,500 at the end of the fifth year. The required rate of return of Ace Inc. is 10 percent. Ace Inc. should invest in:

a.Project B because it has no cash inflows in the first four years of its life.

b.Project B because it has a higher net present value (NPV).

c.Project A because it will yield cash every year for five years.

d.Project A because it has a positive net present value (NPV).

e.Project A because it will generate cash in the initial years of its life.

(PLEASE SHOW ME STEP BY STEP HOW TO DO THIS CALCULATION ON FINANCE CALCULATOR. THANK YOU)

Answer 1

NPV of Project A:
Year	Cashflows	PVF at 10%	Present value
0	-50000	1	-50000
1	15625	0.909091	14204.55
2	15625	0.826446	12913.22
3	15625	0.751315	11739.29
4	15625	0.683013	10672.09
5	15625	0.620921	9701.896
Net present value of A			9231
NPV of Project B
Year	Cashflows	PVF at 10%	Present value
0	-50000	1	-50000
1	0	0.909091	0
2	0	0.826446	0
3	0	0.751315	0
4	0	0.683013	0
5	99500	0.620921	61781.67
Net Present value of B			11781.67
Answer is b. Project B because it has a higher NPV