Answer:
1. Compute the net benefits using a discount rate of 6 percent.
Net befit of Project 1 = $629.04
Net befit of Project 2 = $1,578.47
2. Repeat using a discount rate of 12 percent.
Net befit of Project 1 = $339.38
Net befit of Project 2 = - $373.39
3. What can you conclude from this exercise?
(a) Project 2 should be chosen when the discount rate is 6 percent.
(b) Project 1 should be chosen when the discount rate is 12 percent.
Explanation:
Note: See the attached excel file for the calculations of net benefits for Project 1 and Project 2.
3. What can you conclude from this exercise?
(a) When a discount rate of 6 percent is used, both Project 1 and Project 2 have positive net benefit. But the net benefit of Project 2 of $1,578.47 is higher than the net benefit of Project 1 of $629.04.
Therefore, project 2 should be chosen when the discount rate is 6 percent.
(a) When a discount rate of 12 percent is used, only Project 1 has a net benefit of $339.38, but the net benefit of Project 2 is negative at minus $373.39.
Therefore, project 1 should be chosen when the discount rate is 12 percent.
