Question

GM is considering two mutually exclusive projects, A and B. Project A costs $150,000 and is expected to generate $50,000 in year one, $85,000 in year two, and $35,000 per year in years 3 and 4. Project B costs $120,000 and is expected to generate $64,000 in year one, $45,000 in year two, $25,000 in year three, and $55,000 in year four. GM's required rate of return for these projects is 10%. GM decides to use NPV to evaluate these projects. Which project or projects will they choose?

Project A

Project B

Projects A&B

GM would reject both projects

Answer 1

	Computation of NPV
		i	ii	iii	iv=i*iii	v=ii*iii
		Cash flow			Present value
	Year	Project A	Project B	PVIF @ 10%	Project A	Project B
	0	-150000	-120000	1.0000	(150,000.00)	(120,000.00)
	1	50000	64000	0.9091	45,454.55	58,181.82
	2	85000	45000	0.8264	70,247.93	37,190.08
	3	35000	25000	0.7513	26,296.02	18,782.87
	4	35000	55000	0.6830	23,905.47	37,565.74
					15,903.97	31,720.51
	NPV of A =		15,903.97
	NPV of B =		31,720.51
	We can see that NPV of B is higher compared to A and project are mutually exclusive.
	Which means only one of the project will be selected. In this case project B.
	Correct answer is option :			Project B