Question

Harris Corporation is considering the following two mutually exclusive projects with their projected cash flows:

                                    Year                 Project A          Project B

                                    0                    ($10,000)         ($10,000)

                                    1                         4,500                      0

                                    2                         4,500                      0

                                       3                         4,500              15,000

If the required return on these projects is 10 percent, which would be chosen and why?

Group of answer choices

Project A because of higher IRR

Project B because of higher NPV

Project B because of higher IRR

Project A because of higher NPV

Answer 1

NPV of Project A =Present Value of Cash Inflows - Present Value of Cash Outflows

= [ Respective Cash Flows * Present Value of Discounting Factor(Rate, Time) ] - Present Value of Cash Outflows

= [ Cash Flow in Year 1 * 1/(1+Rate of Interest)^1 +Cash Flow in Year 2 * 1/(1+Rate of Interest)^2 +Cash Flow in Year 3 * 1/(1+Rate of Interest)^3 ] - Present Value of Cash Outflows

= [ 4500*1/(1.1)^1+4500*1/(1.1)^2+4500*1/(1.1)^3]-10,000

= $ 1,190.83

NPV of Project B =Present Value of Cash Inflows - Present Value of Cash Outflows

= [ Respective Cash Flows * Present Value of Discounting Factor(Rate, Time) ] - Present Value of Cash Outflows

= [ Cash Flow in Year 1 * 1/(1+Rate of Interest)^1 +Cash Flow in Year 2 * 1/(1+Rate of Interest)^2 +Cash Flow in Year 3 * 1/(1+Rate of Interest)^3 ] - Present Value of Cash Outflows

= [15000*1/(1.1)^3]-10,000

= $ 1,269.72

The NPV of Project B is greater than the NPV of Project A, and hence Project B would be accepted.

Answer = Project B because of higher NPV