You are considering two projects. Project 1 currently costs $12 million, which i

Solution A Net present value of Project 1 is calculated as follows: Net present value of Project 1 = P.V. of cash inflows

ID: 1102012 • Letter: Y

Question

You are considering two projects.

Project 1 currently costs $12 million, which is to be paid this year;

the returns are $8 million after year 1 and $7 million after year 2.

Project 2 currently costs $11 million, again to be paid this year;

the returns are $7 million after year 1 and $6 million after year 2.

QUESTION:

At an interest rate of 10%, the present value of Project 1 is roughly __________

a. $25.1 million b. $1.1 million c. $22.4 million d. $0 e. $ 0.3 million

While the present value of project 2 is rougly

a. $0 b. $0.3 million c. $ 22.4 million d. $1.1 million e. $25.1 million

Suppose investing in one project eliminates the opportuinity to invest in the other. If the interest rate is 10%, Project _______ is preferable

a. 2 b. 1

Solution A

Net present value of Project 1 is calculated as follows:

Net present value of Project 1 = P.V. of cash inflows

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