Answer:
Project A would be chosen because the NPV is higher. It means that project A would be more profitable than project B.
Explanation:
To determine which project would be recommended, we have to determine the NPV of each project.
Net present value is the present value of after tax cash flows from an investment less the amount invested.
NPV can be calculated using a financial calculator
For project A
Cash flow in year 1 = $-400
Cash flow each year from year 2 to 4 = $55
Cash flow each year from year 5 to 6 = $225
I = 10%
NPV = $27.42
For project B
Cash flow in year 1 = $-600
Cash flow each year from year 2 to 3 = $300
Cash flow each year from year 4 to 5 = $50
Cash flow in year 6 = $49
I = 10%
NPV = $20.73
Project A would be chosen because the NPV is higher
To find the NPV using a financial calculator:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.
3. Press compute
