6. Which project is more profitable? Consider two projects: Project A currently

Question

6. Which project is more profitable? Consider two projects: Project A currently costs $12 million, which is to be paid this year. The returns are $9 million in one year and $8 million in two years. Project B currently costs $14 million, again to be paid this year. The returns are $11 million in one year and $9 million in two years At an interest rate of 6%, the net present value of Project A is roughly ,while the net present value of Project B is roughly Suppose investing in one project eliminates the opportunity to invest in the other. If the interest rate is 6%, Project is preferable.

Explanation / Answer

NPV of Project-A Year Cashflows PVF @6% Present value 0 -12000000 1 -12000000 1 9000000 0.943396 8490566 2 8000000 0.889996 7119972 Net Present value 3610538 NPV at Project-B Year Cashflows PVF @6% Present value 0 -14000000 1 -14000000 1 11000000 0.943396 10377358 2 9000000 0.889996 8009968 Net Present value 4387326 If the interest rate is 6%, the Project B is preferable

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