You are considering two mutually exclusive projects with the following cash flow
ID: 2814765 • Letter: Y
Question
You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 8.5 percent? What if the discount rate is 13 percent?
Year Cash flow (A) Cash flow (B)
0 -$80,000 -$80,000
1 31,000 0
2 31,000 0
3 31,000 110,000
accept project A as it always has the higher NPV
accept project B as it always has the higher NPV
accept B at 8.5 percent and A at 13 percent
accept B at 8.5 percent and neither at 13 percent
a.accept project A as it always has the higher NPV
b.accept project B as it always has the higher NPV
c.accept B at 8.5 percent and A at 13 percent
d.accept B at 8.5 percent and neither at 13 percent
Explanation / Answer
d. accept B at 8.5 percent and neither at 13 percent Statement showing Cash flows Project A Project B Particulars Time PVf 8.5% Amount PV Cash Outflows - 1.00 (80,000.00) (80,000.00) (80,000.00) (80,000.00) PV of Cash outflows = PVCO (80,000.00) (80,000.00) Cash inflows 1.00 0.9217 31,000.00 28,571.43 - - Cash inflows 2.00 0.8495 31,000.00 26,333.11 - - Cash inflows 3.00 0.7829 31,000.00 24,270.15 110,000.00 86,119.89 PV of Cash Inflows =PVCI 79,174.69 86,119.89 NPV= PVCI - PVCO (825.31) 6,119.89 Statement showing Cash flows Project A Project B Particulars Time PVf 13% Amount PV Cash Outflows - 1.00 (80,000.00) (80,000.00) (80,000.00) (80,000.00) PV of Cash outflows = PVCO (80,000.00) (80,000.00) Cash inflows 1.00 0.8850 31,000.00 27,433.63 - - Cash inflows 2.00 0.7831 31,000.00 24,277.55 - - Cash inflows 3.00 0.6931 31,000.00 21,484.56 110,000.00 76,235.52 PV of Cash Inflows =PVCI 73,195.73 76,235.52 NPV= PVCI - PVCO (6,804.27) (3,764.48)
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