Question

 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	​$(102,000​)	​$(102,000)
1	32,000	00
2	32,000	00
3	32,000	00
4	32,000	00
5	32,000	230, 000

If the appropriate discount rate on these projects is 88 ​percent, which would be chosen and​ why?

The NPV of Project A is

Answer 1

Net Present Value – PROJECT A

Year	Annual Cash Flow ($)	Present Value factor at 8%	Present Value of Cash Flow ($)
1	32,000	0.925926	29,629.63
2	32,000	0.857339	27,434.84
3	32,000	0.793832	25,402.63
4	32,000	0.735030	23,520.96
5	32,000	0.680583	21,778.66
TOTAL			1,27,766.72

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $1,27,766.72 - $102,000

= $25,766.72

“Net Present Value – PROJECT A = $25,766.72”

Net Present Value – PROJECT B

Year	Annual Cash Flow ($)	Present Value factor at 8%	Present Value of Cash Flow ($)
1	0	0.925926	0
2	0	0.857339	0
3	0	0.793832	0
4	0	0.735030	0
5	2,30,000	0.680583	1,56,534.14
TOTAL			1,56,534.14

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $156,534.14 - $102,000

= $54,534.14

“Net Present Value – PROJECT B = $54,534.14”

DECISION

The PROJECT B should be selected, since it has the highest Net Present Value (NPV) of $54,534.14 as compared to the NPV of PROJECT A”

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.