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Nadya [2.5K]
3 years ago
15

You are considering two independent projects that have differing requirements. Project A has a required return of 12 percent com

pared to Project B’s required return of 13.5 percent. Project A costs $75,000 and has cash flows of $21,000, $49,000, and $12,000 for Years 1 to 3, respectively. Project B has an initial cost of $70,000 and cash flows of $15,000, $18,000, and $41,000 for Years 1 to 3, respectively. Given this information, you should:
1. accept both Project A and Project B.
2. accept Project A and reject Project B.
3. accept Project B and reject Project A.
4. reject both Project A and Project B.
5. accept whichever one you want but not both.
Business
1 answer:
finlep [7]3 years ago
4 0

Answer:

4. reject both Project A and Project B.

their NPV are negative so are not profitable.

Explanation:

We have to calculate the present value of the projects at their return rate

<u>Project A</u>

Present value of the cash flow - investment = net present value

\frac{21,000}{(1.12)^{1} } = PV

\frac{49,000}{(1.12)^{2} } = PV

\frac{12,000}{(1.12)^{3} } = PV

-75,000 + PV 21,000 + PV 49,000 + PV 12,000

-75,000 + 18,750 + 39062.5 + 8,541.36 = -8646.14

<u>Project B</u>

Present value of the cash flow - investment = net present value

-70,000 + PV 15,000 + PV 18,000 + PV 41,000

\frac{15,000}{(1.135)^{1} } = PV

\frac{18,000}{(1.135)^{2} } = PV

\frac{41,000}{(1.135)^{3} } = PV

-70,000 + 13215.86 + 13972.71 + 28041.18 = -14770.25

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