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 12%?

	Year
	0	1	2	3	4
Project 1	-$50	$15	$15	$5	$5
Project 2	-$30	$20	$10	$10	$10

Answer 1

Project 1

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$50. Indicate the initial cash flow by 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 last cash flow cash flow, press the NPV button and enter the required rate of return of 12%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 12% required rate of return is -$17.91.

Project 2

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$30. Indicate the initial cash flow by 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 last cash flow cash flow, press the NPV button and enter the required rate of return of 12%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 12% required rate of return is $9.30.

Project 2 should be selected since it generates the largest net present value.

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