Project A is opening a bakery at 10 Center Street. Project B is opening a specia

Question

Project A is opening a bakery at 10 Center Street. Project B is opening a specialty coffee shop at the same address. Both projects have unconventional cash flows, that is, both projects have positive and negative cash flows that occur following the initial investment. When trying to decide which project to accept, given sufficient funding to accept either, you should rely most heavily on the _____ method of analysis.

payback

net present value

internal rate of return

profitability index

discounted payback

Explanation / Answer

Net present value (NPV) = Present value of cash inflows-Present value of cash outflows

By using NPV method with required rate of respective projects, we can decide that the project is acceptable or not. If the NPV is positive, project should ne rejected and rejected if negative.

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