Suppose your firm is considering two mutually exclusive, required projects with

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.

Use the NPV decision rule to evaluate these projects; which one(s) should it be accepted or rejected?

accept neither A nor B

reject A, accept B

accept both A and B

accept A, reject B

  Time: 0 1 2 3   Project A Cash Flow -34,000 24,000 44,000 15,000   Project B Cash Flow -44,000 24,000 34,000 64,000

Explanation / Answer

Payback period is 1.83

accept both A and B

Project A Cash Flow 0 -34000 -34000 -34000 1 24000 0.892857 21428.57 -12571.4 2 44000 0.797194 35076.53 22505.1 3 15000 0.71178 10676.7 33181.81 67181.81 Payback period is 1.3584

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