Suppose your firm is considering two mutually exclusive, required projects with
ID: 2719730 • Letter: S
Question
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively. Time: 0 1 2 3 Project A Cash Flow -24,000 14,000 34,000 5,000 Project B Cash Flow -34,000 14,000 24,000 54,000 Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?
Explanation / Answer
PARTICULARS YEAR CASH FLOW DISCOUNT FACTOR PRESENTVALUE
PROJECT A
MACHINERY PURCHASED 0 (38000) 1 (38000)
BDAT 1 24000 0.893 21432
BDAT 2 14000 0.797 11158
BDAT 3 34000 0.712 24208
BDAT 4 5000 0.636 3180
N.PV 25158
PROJECT B
MACHINERY PUR
( YEAR 1 ) 0 (48000) 1 (48000)
BDAT 1 34000 0.893 30362
BDAT 2 14000 0.797 11158
BDAT 3 24000 0.712 17088
BDAT 4 54000 0.636 34344
NPV 44952
PROJECT B WILL BE ACCEPTED HAVING HIGHER NPV THAN PROJECT A AND IS MORE BENEFICIAL THAN PROJECT A BY 19794 (44952 - 25158)
WORKINGS;=
CASH OUTFLOW FOR PROJECT A = PAYBACK PERIOD'S CASH INFLOW
= 24000 + 14000
= $38000
CASH OUTFLOW FOR PROJECT B = PAYBACK PERIOD'S CASH INFLOW
= 34000 + 14000
= $48000
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