Question

Year Project A Project B 0 −$330 −$330 1 160 230 2 160 230 3 160 230 4 160 a. If the opportunity cost of capital is 12%, calculate NPV for both projects? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Project NPV A $ 485.98 B 552.42 b. Which of these projects is worth pursuing if you have enough funds and they are not mutually exclusive? Project A Project B Both

Answer 1

(a)-Net Present Value (NPV) for PROJECT-A & PROJECT-B

Net Present Value (NPV) for PROJECT-A

Period	Annual Cash Flow ($)	Present Value factor at 12.00%	Present Value of Cash Flow ($)
1	160	0.89286	142.86
2	160	0.79719	127.55
3	160	0.71178	113.88
4	160	0.63552	101.68
TOTAL			485.98

Net Present Value (NPV) for PROJECT-A = Present Value of annual cash inflows – Initial Investment

= $485.958 - $330

= $155.98

Net Present Value (NPV) for PROJECT-B

Period	Annual Cash Flow ($)	Present Value factor at 12.00%	Present Value of Cash Flow ($)
1	230.00	0.89286	205.36
2	230.00	0.79719	183.35
3	230.00	0.71178	163.71
TOTAL			552.42

Net Present Value (NPV) for PROJECT-B = Present Value of annual cash inflows – Initial Investment

= $552.42 - $330

= $222.42

(b)-DECISION

“BOTH”. The Both is worth pursuing. Since both the projects a positive Net Present Value are they are not mutually exclusive.

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.