Projects A and B are mutually exclusive and have an initial cost of $78,000 each. Project...

Projects A and B are mutually exclusive and have an initial cost of $78,000 each. Project A provides cash inflows of $32,000 a year for three years while Project B produces a cash inflow of $44,400 a year for two years. Which project(s) should be accepted if the discount rate is 10 percent? What if the discount rate is 12.5 percent?

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Expert Solution

Ans:- In this question, first we will find the Net Present Value for both the projects.we will use the NPV criteria to find which project is better.

Net Present Value is given by PV of cash flow - Initial Investment. we will use the NPV function of excel to find the Present Value and then subtract it from initial investment to find the Net Present Value.

If the discount rate is 10%, then Project A should be selected because it has positive NPV value whereas Project B should be rejected because it has negative NPV.

If the discount rate is 12.5%, then both the projects have negative NPV value, therefore we cant select either of the projects so both the projects should be rejected.

jeff jeffy answered 1 year ago

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