Tnatech is contemplating two different projects and decides to perform a financi
ID: 2422593 • Letter: T
Question
Tnatech is contemplating two different projects and decides to perform a financial analysis to determine which is more financially lucrative. Project A and B have cash flows as shown. Inatech uses a required rate of return of 10% and an inflation rate of 4%. Compute the discounted payback in years and the net present value for both projects, and then offer advice as to the best course of action. 80 pts
Year
A
B
0
-$100,000
-$400,000
1
$20,000
$75,000
2
$50,000
$100,000
3
$50,000
$150,000
4
$25,000
$150,000
5
$500,000
$750,000
Year
A
B
0
-$100,000
-$400,000
1
$20,000
$75,000
2
$50,000
$100,000
3
$50,000
$150,000
4
$25,000
$150,000
5
$500,000
$750,000
Explanation / Answer
Project B has Higher Npv hence project is a Better choice Than B
Real discount rate= (1 + nominal discount rate) ÷ (1+inflation rate) – 1 =(1+10%)/(1+4%)-1 =5.77%
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