Question

You are considering the following two mutually exclusive projects. The required rate of return is 14.6 percent for project A and 13.8 percent for project B. Which project should you accept and why?
Year Project A Project B
0 -$50,000 -$50,000
1 24,800 41,000
2 36,200 20,000
3 21,000 10,000

a. project A; because it has the higher required rate of return
b. project A; because its NPV is about $4,900 more than the NPV of project B
c. project B; because it has the largest total cash inflow
d. project B; because it has the largest cash inflow in year one
e. project B; because it has the lower required return

Answer 1

Answer:

b. project A; because its NPV is about $4,900 more than the NPV of project B

Explanation:

Net present value is the Net value all cash inflows and outflows in present value term. All the cash flows are discounted using a required rate of return.

Mutually exclusive projects are those projects where only one project is selected for investment after analysis. NPV is the most preferred method in the evaluation of mutually exclusive projects for capital budgeting. That project is accepted which has higher positive NPV.

Net present value of Project A =$13,157.24

Net present value of Project A =$8,256.98

Difference = $13,157.24 - $8,256.98 = $4,900.26

Net Present value working is made in MS Excel File which is attached with this answer, please find it.

Download xlsx