You are considering the following two mutually exclusive projects. The required

Question

You are considering the following two mutually exclusive projects. The required rate of return is 14.6 percent for project A and 13.8 percent for project B. Which project should you accept and why? Year: 0, 1, 2, 3 Project A: -$50,000; $24,800; $36,200; $21,000 Project B: -$50,000; $41,000; $20,000; $10,000 A. project A; because it has the higher required rate of return B. project A; because its NPV is about $4,900 more than the NPV of project B C. project B; because it has the largest total cash inflow D. project B; because it has the largest cash inflow in year one E. project B; because it has the lower required return

Explanation / Answer

NPV of A= -50,000+ 24,800/1.146+( 36,200/1.146^2)+(21,000/1.146^3)= $13157.235 NPV of B=-$50,000+(41,000/1.138)+(20,000/1.138^2)+(10,000/1.138^3)= $8256.975 Difference between NPV of A and NPV of B= 13157.235-8256.975= $4900.26 B. project A; because its NPV is about $4,900 more than the NPV of project B

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