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 9 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively Time: Project 21,000 11.000 31,000 2,000 Cash Project 31,000 11,000 21,000 51,000 Cash Use the NPV decision rule to evaluate these projects; which one(s) should it be accepted or rejected? Multiple Choice accept A, reject B

Explanation / Answer

Project A

Project B

Year

cash flow

present value of cash flow = cash flow/(1+r)^n r =9%

Year

cash flow

present value of cash flow = cash flow/(1+r)^n r =9%

0

-21000

-21000

0

-31000

-31000

1

11000

10091.74

1

11000

10091.74

2

31000

26092.08

2

21000

17675.28

3

2000

1544.367

3

51000

39381.36

net present value

sum of present value of cash flow

16728.19

net present value

sum of present value of cash flow

36148.38

Accept B and reject A on the basis of NPV as NPV of B is greater than NPV of A

Project A

Project B

Year

cash flow

present value of cash flow = cash flow/(1+r)^n r =9%

Year

cash flow

present value of cash flow = cash flow/(1+r)^n r =9%

0

-21000

-21000

0

-31000

-31000

1

11000

10091.74

1

11000

10091.74

2

31000

26092.08

2

21000

17675.28

3

2000

1544.367

3

51000

39381.36

net present value

sum of present value of cash flow

16728.19

net present value

sum of present value of cash flow

36148.38

Accept B and reject A on the basis of NPV as NPV of B is greater than NPV of A

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