6. Which project is more profitable? Consider two projects: Project A currently
ID: 1174317 • Letter: 6
Question
6. Which project is more profitable? Consider two projects: Project A currently costs $13 million, which is to be paid this year. The returns are $10 million in one year and $9 million in two years. Project B currently costs $16 million, again to be paid this year. The returns are $13 millon in one year and $11 million in two years. At an interest rate of 10%, 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 10% Project is preferable
Explanation / Answer
The net present value of project A = -13 million + 10 million x (1 + 10%)^(-1) + 9 million x (1 + 10%)^(-2)
= 3.53 million
The net present value of project B = -16 million + 13 million x (1 + 10%)^(-1) + 11 million x (1 + 10%)^(-2)
= 4.91 million
Since the net present value of A < net present value of B, we should select B . Project B is preferable.
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