Question

Project A has cash flows of –$74,900, $18,400, $26,300, and $57,100 for Years 0 to 3, respectively. Project B has cash flows of –$79,000, $18,400, $22,700, and $51,500 for Years 0 to 3, respectively. Both projects are independent, have multiple noncash expenses, and use straight-line depreciation to a zero balance over the project's life. Neither project has any salvage value. Both projects have a required accounting return of 11.5 percent. Should you accept or reject these projects based on the average accounting return?

Answer 1

Answer:

Project A should be accepted NPV  3,948.77

Project B should be rejected NPV  -7.086,76

Explanation:

We will calculate the present value of each cash flow at the discount rate of 11.5% using the formula for present value of a lump sum:

$\frac{Nominal}{(1 + rate)^{time} } = PV$

rate for each cashflow will be 11.5%

time will be the year of the cashflow

and the nominal each cash flow

Project B:

Year 1

$\frac{18400}{(1 + 0.115)^{1} } = PV$  

PV   16,502.24

Year 2

$\frac{22700}{(1 + 0.115)^{2} } = PV$  

PV   18,258.96

Year 3

$\frac{51500}{(1 + 0.115)^{3} } = PV$  

PV   37,152.04

Total discounted cashflow: 71,913.24‬

NPV: discounted cashflow - investment

71,913.24 - 79,000 = -7.086,76

Project B should be rejected NPV  -7.086,76

Project A:

Year 1:

$\frac{18400}{(1 + 0.115)^{1} } = PV$  

PV   16,502.24

Year 2:

$\frac{26300}{(1 + 0.115)^{2} } = PV$  

PV   21,154.66

Year 3:

$\frac{57100}{(1 + 0.115)^{3} } = PV$  

PV   41,191.87

Total discounted cashflow: 78.848,77

NPV:discounted cashflow - investment

78,848.77 - 74,900 = 3,948.77‬

Project A should be accepted NPV  3,948.77