Question

Your company is considering two mutually exclusive projects. Project A has an initial cost of $80,000 and generates expected cash flows of $25,000 per year for six years. Project B has an initial cost of $80,000 and generates expected cash flows of $60,000 per year for two years. The firm's cost of capital is 12.00%. Determine which project you would choose.

Answer 1

Answer:

The company should accept Project B because it generates more value per year as compared to Project A.

Explanation:

Explanation can be seen in the file attached.

Download docx

Answer 2

Answer:

Choose Project A

Explanation:

To choose between two mutually exclusive projects we will use two approaches NPV approach .

Under NPV accept project if NPV is positive and has higher NPV.

Project A NPV

-80 000 + 25000/1.12+25000/1.12^2+25000/1.12^3+25000/1.12^4+25000/1.12^5+25000/1.12^6 = -80000+22321.43+19929.85+17794.51+15887.95+14185.67+12665.78

          =$22,785.19

Project B NPV

- 80 000 + 60000/1.12 ^1+60000/1.12^2 = $21,403.06

Choose A as it has higher NPV.