Question

You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 8.5 percent? What if the discount rate is 13 percent?

Year	Project A	Project B
0	-$80,000	-$80,000
1	31,000	0
2	31,000	0
3	31,000	0

A.) accept A at 8.5 percent and B at 13 percent

B.) accept B at 8.5 percent and A at 13 percent

C.) Accept B at 8.5% and neither at 13 percent

D.) accept A at 8.5 percent and neither at 13 percent

Answer 1

As given Project B has 0 inflows in all three years so it would be rejected at any given discount rate.

Now option d is only valid where we need to identify which at which rate a project should be accepted. Logically NPV will be higher at lesser discount rate so project should be accepted at 8.5%.

Now NPV at both 8.5% and 13% are negative so ideally we should not accept any of the project at any rate however option D is more correct out of all the given option.

Year	Cashflow	PV at 8.5%	PV at 13%
0	-80000	-80000	-80000
1	31000	28571.429	27433.63
2	31000	26333.114	24277.55
3	31000	24270.151	21484.56
	NPV	-825.3065	-6804.269

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