Question

Two investment projects which are mutually exclusive both require a $10,000,000 investment. Projected cash flows are:

                                    Year             Project A           Project B

                                       1             $3,500,000        $6,500,000

                                       2               3,500,000          3,000,000

                                       3               3,500,000          3,000,000

                                       4               3,500,000          1,000,000

If your discount rate is 12 percent, net present value each project and indicate which you would choose and why.

Answer 1

Ans Choose PROJECT B since it has higher NPV than Project A

Year	Project Cash Flows (i)	DF@ 12%	DF@ 12% (ii)	PV of Project A ( (i) * (ii) )
0	-10000000	1	1	(1,00,00,000.00)
1	3500000	1/((1+12%)^1)	0.893	31,25,000.00
2	3500000	1/((1+12%)^2)	0.797	27,90,178.57
3	3500000	1/((1+12%)^3)	0.712	24,91,230.87
4	3500000	1/((1+12%)^4)	0.636	22,24,313.27
		NPV		6,30,722.71

Year	Project Cash Flows (i)	DF@ 12%	DF@ 12% (ii)	PV of Project B( (i) * (ii) )
0	-10000000	1	1	(1,00,00,000.00)
1	6500000	1/((1+12%)^1)	0.893	58,03,571.43
2	3000000	1/((1+12%)^2)	0.797	23,91,581.63
3	3000000	1/((1+12%)^3)	0.712	21,35,340.74
4	1000000	1/((1+12%)^4)	0.636	6,35,518.08
		NPV		9,66,011.88