Happy Company has gathered projected cash flows for two mutually exclusive proje

ID: 2699160 • Letter: H

Question

Happy Company has gathered projected cash flows for two mutually exclusive projects.

Year Project A Project B

0 -$200,000 -$200,000

1 104,000 75,000

2 93,000 86,000

3 79,000 96,000

4 72,000 105,000

a. If the required rate of return is 13.5 percent, should the firm Project A, Project B, both projects or neither project. Explain your choice.

b. If the required rate of return is 27 percent, should the firm Project A, Project B, both projects, or neither project? Explain your choice.

Please show explanation for all answers.

a. If the required rate of return is 13.5 percent, should the firm Project A, Project B, both projects or neither project. Explain your choice.

NPV of project A = 104000/1.135 + 93000/1.135^2 + 79000/1.135^3 +72000/1.135^4-200000 =$61,238.82

NPV of project B = 75000/1.135 + 86000/1.135^2 + 96000/1.135^3 +105000/1.135^4-200000 = $61,766.38

Since NPV of each project is positive , Thus both project should be accepted

b. If the required rate of return is 27 percent, should the firm Project A, Project B, both projects, or neither project? Explain your choice.

NPV of project A = 104000/1.27 + 93000/1.27^2 + 79000/1.27^3 +72000/1.27^4-200000 =$5,793.80

NPV of project B = 75000/1.27+ 86000/1.27^2 + 96000/1.27^3 +105000/1.27^4-200000

= -$396.38

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