Question

In: Finance

You have been assigned the task of evaluating two mutually exclusive projects with the following projected...

You have been assigned the task of evaluating two mutually exclusive projects with the following projected cash​ flows:

YEAR      PROJECT A CASH FLOW                 PROJECT B CASH FLOW

   0          -110,000                                               -110,000

   1          30,000                                                   0

   2          30,000                                                   0

   3          30,000                                                   0

   4          30,000                                                   0

   5          30,000                                                   210,000

If the appropriate discount rate on these projects is 9 ​percent, which would be chosen and​ why?

What is the NPV of project​ A?

​$nothing

​ (Round to the nearest​ cent.)

What is the NPV of project​ B?

​$nothing  

​(Round to the nearest​ cent.)

Which project would be chosen and​ why?  ​(Select the best choice​ below.)

A.

Choose Upper B because its NPV is higher.Choose B because its NPV is higher.

B.

Choose both because they both have positive NPVs.

C.

Choose Upper A because its NPV is higher.Choose A because its NPV is higher.

D.

Cannot choose without comparing their IRRs.

Solutions

Expert Solution

Ans B.Choose both because they both have positive NPVs.

NPV of Project A: $ 6689.54

Year Project Cash Flows (i) DF@ 9% (ii) PV of Project A ( (i) * (ii) )
0 -110000 1                (1,10,000.00)
1 30000 0.917                     27,522.94
2 30000 0.842                     25,250.40
3 30000 0.772                     23,165.50
4 30000 0.708                     21,252.76
5 30000 0.650                     19,497.94
NPV                       6,689.54

NPV of Project B: $ 26485.59

Year Project Cash Flows (i) DF@ 9% (ii) PV of Project B ( (i) * (ii) )
0 -110000 1                (1,10,000.00)
1 0 0.917                                    -  
2 0 0.842                                    -  
3 0 0.772                                    -  
4 0 0.708                                    -  
5 210000 0.650                  1,36,485.59
NPV                     26,485.59

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