Virus Stopper Inc., a supplier of computer safeguard systems, uses a cost of cap

Question

Virus Stopper Inc., a supplier of computer safeguard systems, uses a cost of capital of 8 percent to evaluate average-risk projects, and it adds or subtracts 2 percentage points to evaluate projects of more or less risk. Currently, two mutually exclusive projects are under consideration. Both have a cost of $ 364 and will last 4 years. Project A, a riskier-than-average project, will produce annual end of year cash flows of $ 75 . Project B, of less than average risk, will produce cash flows of $ 230 at the end of Years 3 and 4 only. To the nearest .01, list the NPV of the higher NPV project. Note, if the NPV is negative, place a - sign in front of your answer. Do not use the $ symbol.

Your Answer:

Explanation / Answer

Answer:-

Cost of Capital = 8%

Cost of Capital Adds or Subtracts 2% to evaluate projects of more or less risk.

[ Project-A ]

Project A, a riskier-than-average project.

Cost of Capital = 8 + 2

= 10%

Investment = 364

Year = 4 years

= 75 * 3.1699

= 237.74

NPV = Present Value - Investment

= 237.74 - 364

= -126.26

[ Project-B ]

Project B, of less-than-average project.

Cost of Capital = 8 - 2

= 6%

Investment = 364

Year = 4 years

193.108

NPV = Present Value - Investment

= 375.21 - 364

= 11.29

Project-A NPV is Negative, But Project-B NPV is Posstive.

so Project-B Should be Accept...

= 75 * 3.1699

= 237.74

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