Question

Project Q has an initial cost of $257,412 and projected cash flows of $123,300 in Year 1 and $180,300 in Year 2. Project R has an initial cost of $349,000 and projected cash flows of $184,500 in Year 1 and $230,600 in Year 2. The discount rate is 12.2 percent and the projects are mutually exclusive. Which project(s), if any, should be accepted based on the net present value rule?

	A.	Accept both Projects.
	B.	Accept Project R and reject Project Q.
	C.	Accept Project Q and reject Project R.
	D.	Reject both projects.

Answer 1

Project Q
Discount rate	12.200%
Year	0	1	2
Cash flow stream	-257412	123300	180300
Discounting factor	1.000	1.122	1.259
Discounted cash flows project	-257412.000	109893.048	143222.092
NPV = Sum of discounted cash flows
NPV Project Q =	-4296.86
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project R
Discount rate	12.200%
Year	0	1	2
Cash flow stream	-349000	184500	230600
Discounting factor	1.000	1.122	1.259
Discounted cash flows project	-349000.000	164438.503	183178.116
NPV = Sum of discounted cash flows
NPV Project R =	-1383.38
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Reject both as NPVs are negative