Question

Your firm is considering the following mutually exclusive projects:

Year	Project A	Project B
0	-$3,300,000	-$3,300,000
1	1,940,000	866,000
2	1,350,000	1,250,000
3	850,000	2,325,000

The firm uses a discount rate of 12.628%. At that discount rate we find that

A-Project A is clearly preferred

B-Project B is clearly preferred

C-the projects have roughly the same NPV's

Given that finding, the firm should select ___________because it's NPV is the least sensitive to change

A-Project A

B-Project B

Answer 1

1.

Correct option > C-the projects have roughly the same NPV's

2.

Correct option is > A-Project A

Given that finding, the firm should select Project A because it's NPV is the least sensitive to change

.

Reason: The major cash flow for Project A falls in 1^st and 2^nd years hence it is least sensitive to change. The Project B has largest cash flow in year 3 hence it is sensitive to interest rate change.

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NPV Working:

Project A

		Discount rate = WACC = R = 12.628%	Present Values
Year	Cash flows	Discount factor or PV factors = Df = 1/(1+R)^Year	PV of cash flows = Cash flows x Df
0	-$3,300,000.00	1.000000	-$3,300,000.00
1	$1,940,000.00	0.887879	$1,722,484.64
2	$1,350,000.00	0.788329	$1,064,243.54
3	$850,000.00	0.699940	$594,949.10
		Net Present Value = Total of Present Values =	$81,677.28

Project B

		Discount rate = WACC = R = 12.628%	Present Values
Year	Cash flows	Discount factor or PV factors = Df = 1/(1+R)^Year	PV of cash flows = Cash flows x Df
0	-$3,300,000.00	1.000000	-$3,300,000.00
1	$866,000.00	0.887879	$768,902.94
2	$1,250,000.00	0.788329	$985,410.69
3	$2,325,000.00	0.699940	$1,627,360.76
		Net Present Value = Total of Present Values =	$81,674.39