Question

A firm is considering the following mutually exclusive investment projects: Project A requires an initial outlay of $500 and will return $120 per year for the next seven years. Project B requires an initial outlay of $5,000 and will return $1,350 per year for the next five years. The required rate of return is 10%. What is the net present value of the project with the highest net present value?

Answer 1

Answer:

Project B

Explanation:

The computation of the net present value is shown below:

= Cash inflows - cash outflows

For Project A, it would be

= $120 × PVIFA factor for 7 years at 10% - $500

= $120 × 4.8684 - $500

= $584.208 - $500

= $84.208

For Project B, it would be

= $1,350 × PVIFA factor for 5 years at 10% - $5,000

= $1,350 × 3.7908  - $5,000

= $5,117.58 - $5,000

= $117.58

Refer to the PVIFA table

So, project B has the highest net present value