Suppose a company has two mutually exclusive projects, both of which are three y
ID: 2782221 • Letter: S
Question
Suppose a company has two mutually exclusive projects, both of which are three years in length. Project A has an initial outlay of $10,000 and has expected cash flows of $2,000 in year 1, $4,000 in year 2, and $4,000 in year 3. Project B has an initial outlay of $6,000 and has expected cash flows of $2,000 in year 1, $5,000 in year 2, and $6,000 in year 3. The required rate of return is 15% for projects at this company. What is the net present value for the best project? (Answer to the nearest dollar.)
Explanation / Answer
A:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=2000/1.15+4000/1.15^2+4000/1.15^3
=$7393.77
NPV=Present value of inflows-Present value of outflows
=$7393.77-$10000
=-$2606(Approx)
B:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=2000/1.15+5000/1.15^2+6000/1.15^3
=$9464.95
NPV =$9464.95-$6000
=$3465(Approx).[B has NPV higher than A].
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