Question

Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial cash outflow...

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)

Homework Answers

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
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