Norman, Inc., is considering two mutually exclusive projects. Project A is a six

Question

Norman, Inc., is considering two mutually exclusive projects. Project A is a six-year project with a NPV of $3,000 and Project B is a four-year project with an NPV of $2,278. Project A has an equivalent annual cash flow of $730 and Project B has an equivalent annual cash flow of $750. Which project should the firm select?

Choose Project A because it has the higher NPV.

Choose Project B because it has the lower NPV.

Choose Project B because it has the higher equivalent annual cash flow.

Choose Project A because it has the lower equivalent annual cash flow.

Now I can see that the answer is C but I dont understand why it is C? Project A has the higher NPV and has 6 years of almost equal cash flows?

Choose Project A because it has the higher NPV.

Explanation / Answer

In case of different project lifes decision should be based on Equivalent Annual Cash flow instead of NPV.

In this Case eventhough NPV of Project is higher but it needs 6 years Whereas its Equivalent Annual Cash flow is less than Project B.

Therefore Select Project B

Answer c

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.