Answer:
Option (E) Never
Explanation:
NPV from Investment Project 1 = ($255,000) + $21,000 / (r)
NPV from Investment Project 2 = ($175,000) + $29,000 / (r)
The question says that find the number of years that equals the total return which means the NPV from both investments is equal:
($255,000) + $21,000 / (r) = ($175,000) + $29,000 / (r)
$21,000 / (r) - $29,000 / (r) = $255,000 - $175,000
-$8000 / r = $80,000
r = - 8000 / 80000 = -0.01 = - 10%
The negative sign shows that project A can not make a positive NPV that will be equal to that of project B and vice versa. It can also be illustrated by putting the value of r in "NPV from Investment Project 1"
NPV from Investment Project 1 = ($255,000) + 21000 / -0.01
= ($255,000) - $210,000 = ($465,000)
This shows that the company will have to make losses of $465,000 which is not possible because company will not select projects with negative NPVs.
