Here are the cash-flow forecasts for two mutually exclusive projects: a-1. What
ID: 2812364 • Letter: H
Question
Here are the cash-flow forecasts for two mutually exclusive projects:
a-1. What is the NPV of each project if the opportunity cost of capital is 5%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
a-2. Which project would you choose?
Project A
Project B
b-1. What is the NPV of each project if the opportunity cost of capital is 12%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b-2. Which would you choose?
Project A
Project B
Cash Flows (dollars) Year Project A Project B 0 118 118 1 48 67 2 68 67 3 88 67Explanation / Answer
a
a1
Project A
NPV = $65.41
Discount rate = R =
5.00%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-118.00
1.000000
-118.0000
1
48.00
0.952381
45.7143
2
68.00
0.907029
61.6780
3
88.00
0.863838
76.0177
Total of PV = NPV =
$65.41
Project B
NPV = $64.46
Discount rate = R =
5.00%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-118.00
1.000000
-118.0000
1
67.00
0.952381
63.8095
2
67.00
0.907029
60.7710
3
67.00
0.863838
57.8771
Total of Present values = NPV =
$64.46
a2
Choose --- Project A
We should choose project with Highest NPV
Hence, Project A is the choice here because it has higher NPV than Project B
b
b1
Project A
NPV = $41.70
Discount rate = R =
12.00%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-118.00
1.000000
-118.0000
1
48.00
0.892857
42.8571
2
68.00
0.797194
54.2092
3
88.00
0.711780
62.6367
Total of PV = NPV =
$41.70
Project B
NPV = $42.92
Discount rate = R =
12.00%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-118.00
1.000000
-118.0000
1
67.00
0.892857
59.8214
2
67.00
0.797194
53.4120
3
67.00
0.711780
47.6893
Total of Present values = NPV =
$42.92
b2
Choose ----- Project B
We should choose project with Highest NPV
Hence, Project B is the choice here because it has higher NPV than Project A
Discount rate = R =
5.00%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-118.00
1.000000
-118.0000
1
48.00
0.952381
45.7143
2
68.00
0.907029
61.6780
3
88.00
0.863838
76.0177
Total of PV = NPV =
$65.41
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