Consider the following cash flows for two mutually exclusive investments: t=0 t=

Question

Consider the following cash flows for two mutually exclusive investments:

t=0                  t=1                  t=2                  t=3      

                  A        -1900                657                  829                  962

                  B       -3060                 322                  450                  3048

If the financing rate is 7.52%, which of the following is correct?

Select one:

a.  Choose B because the NPV is greater by $ 202

b. Choose A because the NPV is greater by $ 121

c.  Choose A because the NPV is greater by $ 202

d. You are indifferent between the two investments

e. Choose B because the NPV is greater by $ 121

Explanation / Answer

Year Project A Project B PV @ 7.52% Present Value Project A Present Value Project B 0 -$1,900.00 -$3,060.00 1 -$1,900.00 -$3,060.00 1 $657.00 $322.00 0.930 $611.05 $299.48 2 $829.00 $450.00 0.865 $717.09 $389.25 3 $962.00 $3,048.00 0.805 $773.94 $2,452.15 Difference NPV $202.08 $80.88 $121 b.Choose A because the NPV is greater by $ 121

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