You are considering the following two mutually exclusive projects. The required
ID: 2733286 • Letter: Y
Question
You are considering the following two mutually exclusive projects. The required rate of return is 12 percent for project A and 11 percent for project B. (All amounts in AED.)
Year
Project A
Cash Flows
Project B
Cash Flows
Year O
48,000
126,900
Year 1
18,400
69,700
Year 2
31 ,300
80,900
Year 3
11,700
Using the net present value method, which project should you accept and why?
PROJECT A:
Year
Cash Flow
PVIF (12% , n)
Present Value
48,000
1 .oooo
1
18 400
0.8929
16,429.36
2
31,300
0.7972
24,952.36
3
11,700
0.7118
8,328.06
NPV
1,709.78
PROJECT B:
Year
Cash Flow
PVIF (11 0/0 , n)
Present Value
0
126,900
1 .oooo
-126,900.00
1
69,700
0.9009
62,792.73
2
80,900
0.8116
65,658.44
3
0.7312
0.00
NPV
1,551.17
NPV is an indicator of how much value an investment or project adds to the firm.
The Project with a higher NPV should be chosen since it adds more value. Hence Proiect A should be accepted.
Year
Project A
Cash Flows
Project B
Cash Flows
Year O
48,000
126,900
Year 1
18,400
69,700
Year 2
31 ,300
80,900
Year 3
11,700
Using the net present value method, which project should you accept and why?
PROJECT A:
Year
Cash Flow
PVIF (12% , n)
Present Value
48,000
1 .oooo
1
18 400
0.8929
16,429.36
2
31,300
0.7972
24,952.36
3
11,700
0.7118
8,328.06
NPV
1,709.78
PROJECT B:
Year
Cash Flow
PVIF (11 0/0 , n)
Present Value
0
126,900
1 .oooo
-126,900.00
1
69,700
0.9009
62,792.73
2
80,900
0.8116
65,658.44
3
0.7312
0.00
NPV
1,551.17
NPV is an indicator of how much value an investment or project adds to the firm.
The Project with a higher NPV should be chosen since it adds more value. Hence Proiect A should be accepted.
Explanation / Answer
Answer:
The Project with a higher NPV should be chosen since it adds more value. Hence Proiect A should be accepted.
Project A Year Cash Flow PVIF (12%) Present value 0 -48000 1.0000 -48000.00 1 18400 0.8929 16429.36 2 31300 0.7972 24952.36 3 11700 0.7118 8328.06 NPV 1709.78 Project B Year Cash Flow PVIF (11%) Present value 0 -126900 1.0000 -126900.00 1 69700 0.9009 62,792.73 2 80900 0.8116 65658.44 3 0 0.7312 0.00 NPV 1551.17Related Questions
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