Question

A company is evaluating two possible projects with the following cash flows. Suppose that the projects are contingent. Which answer describes the correct decision if the firm's required rate of return is 15%?

	Year
	0	1	2	3	4
Project 1	-$50	$10	$15	$10	$20
Project 2	-$30	$20	$15	$30	$10

Question 16 options:

	Accept both projects.
	Accept project 1 and reject project 2.
	Accept project 2 and reject project 1.
	Reject both projects.

Answer 1

	NPV of Project 1
	Year	Cash Flow	PV Factor	PV Of Cash Flow
	a	b	c=1/1.15^a	d=b*c
	0	$              -50	1	$                 -50.00
	1	$                10	0.8695652	$                     8.70
	2	$                15	0.7561437	$                   11.34
	3	$                10	0.6575162	$                     6.58
	4	$                20	0.5717532	$                   11.44
	Net Present Value			$                 -11.95
	NPV of Project 2
	Year	Cash Flow	PV Factor	PV Of Cash Flow
	a	b	c=1/1.15^a	d=b*c
	0	$              -30	1	$                 -30.00
	1	$                20	0.8695652	$                   17.39
	2	$                15	0.7561437	$                   11.34
	3	$                30	0.6575162	$                   19.73
	4	$                10	0.5717532	$                     5.72
	Net Present Value			$                   24.18
	Correct Answer = Accept project 2 and reject project 1.
	Reason : Proect 1 has negative NPV whereas project 2 has postive NPV.