Question

You are considering the following two mutually exclusive projects that will not be repeated. The required rate of return is 11.25% for project A and 10.75% for project B. Which project should you accept and why?

Year      Project A Project B

0 -48,000 -126,900

1 18,400 69,700

2 31,300 80,900

3 11,700 0

		project A; because its NPV is about $335 more than the NPV of project B
		project A; because it has the higher required rate of return
		project B; because it has the largest total cash inflow
		project B; because it returns all its cash flows within two years

Answer 1

Project A
Particulars	Year	Cash flows	PVF @ 11.25%	PV
Cash outflow	0	-48000	1.00	(48,000.00)
Cash inflow	1	18400	0.90	16,539.33
Cash inflow	2	31300	0.81	25,289.74
Cash inflow	3	11700	0.73	8,497.39
Net Present Value				2,326.46
Project B
Particulars	Year	Cash flows	PVF @ 10.75%	PV
Cash outflow	0	-126900	1.00	(126,900.00)
Cash inflow	1	69700	0.90	62,934.54
Cash inflow	2	80900	0.82	65,957.02
Cash inflow	3	0	0.74	-
Net Present Value				1,991.56

Project A should be accepted since its NPV is 335 more than project B