Question

You are considering two mutually exclusive projects, A and B.

Project A costs $70,000 and generates cash flows of $12,000 for 10 years.

Project B costs $60,000 and generates cash flows of $2,000 for six years and then cash flows of $29,000 for four years.

Which project would you accept if your discount rate was 10%? Which project would you accept if your discount rate was 5%?

Answer 1

1.Project A

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$70,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the third cash flow cash flow, press the NPV button and enter the discount of 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $3,434.81.

Project B

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$60,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the third cash flow cash flow, press the NPV button and enter the discount of 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $600.41.

Project A should be accepted since it has the highest net present value.

2. Project A

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$70,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the third cash flow cash flow, press the NPV button and enter the discount of 5%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $22,660.82.

Project B

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$60,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the third cash flow cash flow, press the NPV button and enter the discount of 5%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $26,886.63.

Project B should be accepted since it has the highest net present value.

In case of any query, kindly comment on the solution.