Question

You are considering the following two mutually exclusive projects. The required return on each project is 12 percent. Which project should you accept and what is the best reason for that decision? Year Cash Flow (A) Cash Flow (B) 0 −$ 32,000 −$ 26,000 1 11,500 3,500 2 15,900 5,800 3 13,200 24,900

Answer 1

Answer:

Project A should be chosen because its NPV is positive ($338.74), while project B's NPV is negative

Explanation:

Year      Cash Flow (A)      Cash Flow (B)

0                -$32,000             -$26,000

1                     11,500                   3,500

2                   15,900                   5,800

3                   13,200                 24,900

NPV project A = -$32,000 + $11,500/1.12 + $15,900/1.12² + $13,200/1.12³ = $338.74

NPV project B = -$26,000 + $3,500/1.12 + $5,800/1.12² + $24,900/1.12³ = -$527.95