Question

Virus Stopper Inc., a supplier of computer safeguard systems, uses a cost of capital of 9 percent to evaluate average-risk projects, and it adds or subtracts 3 percentage points to evaluate projects of more or less risk. Currently, two mutually exclusive projects are under consideration. Both have a cost of $ 303 and will last 4 years. Project A, a riskier-than-average project, will produce annual end of year cash flows of $ 88 . Project B, of less than average risk, will produce cash flows of $ 227 at the end of Years 3 and 4 only. To the nearest .01, list the NPV of the higher NPV project. Note, if the NPV is negative, place a - sign in front of your answer. Do not use the $ symbol.

Answer 1

Solution :

The NPV of the Project A in dollars = - 35.71

The NPV of the Project B in dollars = 67.40

The Project with higher NPV = Project B = $ 67.40

The discount rate for the riskier than average project is = 9 % + 3 % = 12 %

The discount rate for the less than average risk project is = 9 % - 3 % = 6 %

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.