a company is considering investing in three muntually exclusive projects . each

Question

a company is considering investing in three muntually exclusive projects . each project willl require a $200,000 initial investment and will provide cash flow for a three year period. each project willnot last beyond three years. as following: Q?If the company considers the time value of money in determing which project to invest in, which project represents the best investment???

project#1 project #2. project#3

year 1:   $200,000 $400,000 $600,000

year 2: 400,000. 400,000 400,000

yaer 3; 600,000 400,000 200,000

Explanation / Answer

Let us assume the interest rate be 10% Present value of cash flows provided are as follows: Project 1=(200000*0.90909)+(400000*0.82645)+(600000*0.75131)= $963184 Project 2=(400000*0.90909)+(400000*0.82645)+(400000*0.75131)=$994740 Project 3=(600000*0.90909)+(400000*0.82645)+(200000*0.75131)= $1026296 As it can be clearly seen Project 3 provides the highest present value of cash flows so it should be selected

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