Question

Which mutually exclusive project would you select, if both requires initial investment at $10,000 and your discount rate is 8%; Project A with seven annual cash flows of $5,000, or Project B, with four years of zero cash flow followed by a lump sum of $35,000 in year five? Group of answer choices:

A. You are indifferent, since NPV’s are equal

B. ProjectA

C.Neither project should be selected

D. Project B

Answer 1

Ans:

Discount rate = 8%

NPV of Project A = $ 16,031.85    (Note1)

NPV of project B = $ 13,820.41 (Note 2)

Option B, Project A. as NPV is more.

Note 1:

Project A	Discount rate = 8%
Year	Present value factor =1/(1+r)^n	Present value factor (A)	Net Cash flows (inflows-outflows) (B) ($)	Present value of cash flows (A*B) ($)
1	1/(1+8%)	0.9259	5000	4629.63
2	1/(1+8%)^2	0.8573	5000	4286.69
3	1/(1+8%)^3	0.7938	5000	3969.16
4	1/(1+8%)^4	0.7350	5000	3675.15
5	1/(1+8%)^5	0.6806	5000	3402.92
6	1/(1+8%)^6	0.6302	5000	3150.85
7	1/(1+8%)^7	0.5835	5000	2917.45
			Present value of cash inflows	26031.85
			Less: Initial outflow	10000.00
			NPV	16031.85

Note 2:

Project B	Discount rate = 8%
Year	Present value factor =1/(1+r)^n	Present value factor (A)	Net Cash flows (inflows-outflows) (B) ($)	Present value of cash flows (A*B) ($)
1	1/(1+8%)	0.9259	0	0.00
2	1/(1+8%)^2	0.8573	0	0.00
3	1/(1+8%)^3	0.7938	0	0.00
4	1/(1+8%)^4	0.7350	0	0.00
5	1/(1+8%)^5	0.6806	35000	23820.41
			Present value of cash inflows	23820.41
			Less: Initial outflow	10000.00
			NPV	13820.41