Answer:
Project A shall be accepted as Project A has positive and higher NPV than Project B.
Explanation:
Since the projects are mutually exclusive we will evaluate the NPV that is Net present value of the projects.
Project A
Present Value of Cash outflow = $54,500
Rate of return = 13.9%
Present value of cash inflows
Year Cash flow PV @13.9% Present Value
1 $16,400 0.878 $14,399.2
2 $28,900 0.771 $22,281.9
3 $31,700 0.677 $21,460.9
Total cash inflow $58,142
NPV = $58,142 - $54,500 = $3,642
Project B
Present Value of Cash outflow = $69,400
Rate of return = 12.5%
Present value of cash inflows
Year Cash flow PV @ 12.5% Present Value
1 $0 0.888 $0
2 $48,300 0.790 $38,157
3 $42,100 0.702 $29,554.2
Total cash inflow $67,711.2
NPV = $67,711.2 - $69,400 = -$1,688.8
Since NPV of Project B is negative and that of project A is positive Project A shall be selected, as there will be loss in case of Project B.
