Question

In: Finance

You are comparing two projects. One is a four-year project costing $1 million and will provide...

You are comparing two projects. One is a four-year project costing $1 million and will provide benefit of $500K/year. The second is an eight-year project with annual CFs of $500K/year and an initial cost of $1.5 million. If there is a 70% chance the cost of the first project will drop by 30% after the first four years and the remaining cash flows stay at $500K/year, which project is the better choice? The discount rate is 10%.

Solutions

Expert Solution

NPV = PV of Cash Inflows - PV of Cash Outflows

PV of Cash Inflows = Cash Inflow1 / (1 + Discount Rate)1 + Cash Inflow2 / (1 + Discount Rate)2 + ...... + Cash Inflown / (1 + Discount Rate)n

The manager should choose Project 2 because NPV of Project 2 is higher than NPV of Project 1.

jeff jeffy answered 2 years ago
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