vlet/quiz?quiz action-takeQuiz&quiz; probGuid-Q4PLCOA801010000003adc25f00a000o&c

Question

vlet/quiz?quiz action-takeQuiz&quiz; probGuid-Q4PLCOA801010000003adc25f00a000o&ct-MBuisueUT; Investment, the Capital Market, and the Wealth of Nations (Mobile-Enabled) Graded Assignment Due Sunday 12.03.17 at 11:00 PM Attempts: Do No Harm: 12 6. Which project is more profitable? Consider two projects: Project A currently costs $15 million, which is to be paid this year. The returns are $12 million in one year and million in two years. Project B currently two years. costs $13 millon, again to be paid this year. The returns are $10 million in one year and $8 million in At an interest rate of 6%, the net present value of Project A is roughly-_ , while the net present value of Project B is roughly Suppose investing in one project eliminates the opportunity to invest in the other. If the interest rate is 6%, Project- is preferable. Copyright Notices Terms of Use Privacy Notice Security Notice Accessibility

Explanation / Answer

For project A, initial cost = $15 mn

cash flows in ist year: $12 mn and in the second year $11 mns, discount factor = 6%= 0.06

Net present value [ 12/(1+0.06) + 12/(1+0.06)2] - 15

= 11.32 + 12/0.124- 15 = 11.32+9.786- 15 = $6.10 mn

For project B

NPV =  10/(1+0.06) + 8/(1+0.06)2] - 13

= 9.43 + 7.12 - 13 = $4.55mn roughly

B. Project A is preferable as the net present value is greater in this project indicating higher chances of profitabilty. Higher positive cash flows can be expected from project A.

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