Project A has an initial cost of $80,000 and provides cash inflows of $34,000 a
ID: 2774354 • Letter: P
Question
Project A has an initial cost of $80,000 and provides cash inflows of $34,000 a year for three years. Project B has an initial cost of $80,000 and produces a cash inflow of $114,000 in year three. The projects are mitially exclusive.Which project(s) should you accept if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent? A. Accept A as it always has the higher NPV. B. Accept B as it always has the higher NPV. C. Accept A at 11.7 percent and B at 13.5 percent. D. Accept B at 11.7 percent and A at 13..5 percent E. Accept A at 11.7 percent and neither at 13.5 percent
Explanation / Answer
E. Accept A at 11.7 percent and neither at 13.5 percent Statement showing NPV Project A Project B Particulars Time PVf@11.7% Amount PV Amount PV Cash Outflows - 1.00 (80,000.00) (80,000.00) (80,000.00) (80,000.00) PV of Cash outflows (80,000.00) (80,000.00) Cash inflows 1.00 0.8953 34,000.00 30,438.68 - Cash inflows 2.00 0.8015 34,000.00 27,250.38 - Cash inflows 3.00 0.7175 34,000.00 24,396.04 114,000.00 81,798.50 PV of Cash Inflows 82,085.10 81,798.50 NPV 2,085.10 1,798.50 Statement showing NPV Project A Project B Particulars Time PVf@13.5% Amount PV Amount PV Cash Outflows - 1.00 (80,000.00) (80,000.00) (80,000.00) (80,000.00) PV of Cash outflows (80,000.00) (80,000.00) Cash inflows 1.00 0.8811 34,000.00 29,955.95 - Cash inflows 2.00 0.7763 34,000.00 26,392.90 - Cash inflows 3.00 0.6839 34,000.00 23,253.66 114,000.00 77,968.16 PV of Cash Inflows 79,602.51 77,968.16 NPV (397.49) (2,031.84)
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