Question

You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision?

Year	Project A			Project B
0	−$	24,000		−$	21,000
1		9,500			6,500
2		16,200			9,800
3		8,700			15,200

• Project A; because it pays back faster

• Project A; because it has the higher profitability index

  Incorrect

• Project B; because it has the higher profitability index

• Project B; because it has the higher net present value

• Project A; because it has the higher net present value

Answer 1

In case of Mutually exclusive Projects, Select the Project with Higher NPV.

NPV = PV of Cash Inflows - PV of cash Outflows

Project A:

Year	CF	PVF @14%	Disc CF
0	$ -24,000.00	1.0000	$ -24,000.00
1	$    9,500.00	0.8772	$    8,333.33
2	$ 16,200.00	0.7695	$ 12,465.37
3	$    8,700.00	0.6750	$    5,872.25
NPV			$    2,670.96

Project B:

Year	CF	PVF @14%	Disc CF
0	$ -21,000.00	1.0000	$ -21,000.00
1	$    6,500.00	0.8772	$    5,701.75
2	$    9,800.00	0.7695	$    7,540.78
3	$ 15,200.00	0.6750	$ 10,259.57
NPV			$    2,502.10

Project A is selected as it is having higher NPV.

OPtion E is ocrrect.