Analyze the cash flows for two proposed projects, Project A and Project B. Each

Question

Analyze the cash flows for two proposed projects, Project A and Project B. Each project has a cost of $10,000, and the desired rate of return for each project is 12%. Expected cash flows are:

The IRR for Project A is 18% while for Project B is 15%.

After analyzing the cash flow data for both projects, assess the following:

1. Calculate each project’s Net Present Value (NPV)

2. Identify the project that is the best option, if only one project can be selected. Give reasons for your choice.

Please include detailed calculations when identifying the NPV.

Thanks!

Year Project A Project B 0 ($10,000) ($10,000) 1 $6,500 $3,500 2 $3,000 $3,500 3 $3,000 $3,500 4 $1,000 $3,500

Explanation / Answer

Answer:1

Answer:2 Project A is selected because Its NPV is greater than Project B and Its IRR is also greater than project B.

Year Project A Project B PVF (12%) Project A PV ($) Project B PV ($) 0 -10000 -10000 1 -10000 -10000 1 6,500 3,500 0.893 5804.5 3125.5 2 3000 3,500 0.797 2391 2789.5 3 3000 3,500 0.712 2136 2492 4 1000 3,500 0.636 636 2226 NPV 967.5 633

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