Question

There are two unequal life time mutually exclusive alternative investments, A and B with the following cash flows. Other investment opportunities exist at 14% minimum rate of return.

Project A

C=$150	I=$55	I=$50	I=$45	I=$40	I=$35	L=$150
0	1	2	3	4	5

Project B

C=$100	I=$50	I=$45	I=$40	L=$100
0	1	2	3

C: Cost, I:Income, L:Salvage

(1) Calculate the incremental NPV for this mutually exclusive project choice. Specifically, calculate NPV_B-A.

(2) Calculate the incremental ROR for this mutually exclusive project choice. Specifically, calculate ROR_A-B.

In this question, please enter your percentage answer as a whole number to two decimal places. For example, if your final answer is 7.5%, you would enter 7.5 in the text box, not 0.075.

Answer 1

1: NPV B-A = -$13.88

2:ROR A-B = 18.56

Years	Project A	B	B-A	A-B
0	-150	-100	$50.00	-50
1	55	50	($5.00)	5
2	50	45	($5.00)	5
3	45	140	$95.00	-95
4	40		($40.00)	40
5	185		($185.00)	185
		NPV B-A	($13.88)
		ROR A-B		18.56%