Question

Mutually exclusive investments.

The following are cash flows of two projects.

Year  Project A Project B

0 $ (200) $ (200)

1 80 100

2 80 100

3 80 100

4 80

Calculate the NPV for both projects if the discount rate is 11%(Do not intermediate calculations.Round your answer to 2 decimal places)

Suppose that you can only choose one of the these projects. Which would you choose ?

project A

Project B

Neither

Answer 1

Project A

Year	Cashflow	PVF@11%	Cashflow*PVF
0	(200)	1	(200.00)
1	80	0.9009	72.07
2	80	0.8116	64.93
3	80	0.7312	58.50
4	80	0.6587	52.70

NPV = PV of inflows-PV of outflows

= (72.07+64.93+58.5+52.7)-200

= 248.2-200

= $48.20

Project B

Year	Cashflow	PVF@11%	Cashflow*PVF
0	(200)	1	(200.00)
1	100	0.9009	90.09
2	100	0.8116	81.16
3	100	0.7312	73.12

NPV = PV of inflows-PV of outflows

= (90.09+81.16+73.12)-200

= 244.37-200

= $44.37

Decision: Since both have positive NPV,both are acceptable. When the projects are mutually exclusive,Select one which has higher NPV, project A