A firm is evaluating two mutually exclusive projects that have unequal lives. Yo

Question

A firm is evaluating two mutually exclusive projects that have unequal lives. You have been hired to evaluate the projects using the annualized net present value approach and recommend which project they should select. The firm's cost of capital has been determined to be 18 percent, and the projects have the following initial investments and cash flows:

Project 1 Project 2 Initial Investment $40,000 $58,000 Cash Flows 1 $20,000 $30,000 2 $20,000 $35,000 3 $20,000 $40,000 4 $20,000 $20,000 5 $20,000 $20,000

Explanation / Answer

Project A should be chosebn as it is having higher NPV as compare to project B with lower NPV

Particulars Year PVF @ 18% Cash Flows A Cash Flows B PV A PV B Cash Outflows 0               1.00 -40000 -58000 (40,000.00) (58,000.00) Cash Inflows 1               0.85 20000 30000     16,949.15     25,423.73 Cash Inflows 2               0.72 20000 35000     14,363.69     25,136.46 Cash Inflows 3               0.61 20000 40000     12,172.62     24,345.23 Cash Inflows 4               0.52 20000 0     10,315.78                     -   Cash Inflows 5               0.44 20000 0        8,742.18                     -   NPV     22,543.42     16,905.42

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