Suppose Ryan is a firm owner, who has 4 potential projects with the cash flow la

Question

Suppose Ryan is a firm owner, who has 4 potential projects with the cash flow layout in the following table. A negative cash flow represents the cost he has to pay out of pocket, and a positive cash flow represents the benefit he receives. Assume that the prevailing interest rate is 5%. Based on the rule to always choose the project with the highest net present value, which project is Ryan choosing?

For... Project: A

Cash flows realized today (in million dollars): $65m

Cash flows realized ONE Year from today (in million dollars): $40m

For... Project: B

Cash flows realized today (in million dollars): $-10m

Cash flows realized ONE Year from today (in million dollars): $120m

For... Project: C

Cash flows realized today (in million dollars): $115m

Cash flows realized ONE Year from today (in million dollars): $-15m

For... Project: D

Cash flows realized today (in million dollars): $100m

Cash flows realized ONE Year from today (in million dollars): $0m

Answer is Project B. Can you show me the work done for this?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Project A (NPV) = 65 + 40/(1+.05) = 103.10

Project B (NPV) = -10 + 120/(1+.05) = 104.29

Project C (NPV) = 115 - 15/(1+.05) = 100.71

Project D (NPV) = 100 + 0/(1+.05) = 100

Option B (Project B) is the correct answer, as it results in the highest NPV of 104.29

Thanks.

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