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 Project A 21000 Cash Flow Project B Cash Flow 1,000 31000 2,000 1.000 1,000 21,000 51000 Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected? O accept neither A norB O accept A, reject B O accept both A and B O reject A, accept B

Explanation / Answer

Time Project A Cash Flow Project B Cash Flow PV @ 9% Present Value Project A Present Value Project B 0 -$21,000.00 -$31,000.00 1.0000 -$21,000.00 -$31,000.00 1 $11,000.00 $11,000.00 0.9174 $10,091.74 $10,091.74 2 $31,000.00 $21,000.00 0.8417 $26,092.08 $17,675.28 3 $2,000.00 $51,000.00 0.7722 $1,544.37 $39,381.36 NPV $16,728.19 $36,148.38 Time Project A Cash Flow Cumulative 0 -$21,000.00 -$21,000.00 1 $11,000.00 -$10,000.00 2 $31,000.00 $21,000.00 3 $2,000.00 Payback period = 1+ 10000/31000 1.32 years Time Project B Cash Flow cumulative 0 -$31,000.00 -$31,000.00 1 $11,000.00 -$20,000.00 2 $21,000.00 $1,000.00 $51,000.00 Payback period = 1+ 1/51000 1.95 years Accept Both A and B Because both have positive NPV and they are meeting NPV criteria also.

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