Question

Q3- For two mutually exclusive projects, the cash flows are given. If MARR is 10%, which project should we select? please show all steps and all work

N(year)	P1	P2
0	-$3000	-$12000
1	$1350	4200
2	1800	6225
3	1500	6330

Answer 1

The objective of investment is to create money.So, We will select project that has higher Net Present value.
Project P1:
Year	Cash flows	Discount factor	Present value
a	b	c=1.10^-a	d=b*c
0	$       -3,000	1.0000	$   -3,000.00
1	$         1,350	0.9091	$     1,227.27
2	$         1,800	0.8264	$     1,487.60
3	$         1,500	0.7513	$     1,126.97
Net Present value			$         841.85
Project P2:
Year	Cash flows	Discount factor	Present value
a	b	c=1.10^-a	d=b*c
0	$     -12,000	1.0000	$ -12,000.00
1	$         4,200	0.9091	$     3,818.18
2	$         6,225	0.8264	$     5,144.63
3	$         6,330	0.7513	$     4,755.82
Net Present value			$     1,718.63
So, on the basis of Net Present value, Project P2 should be selected.