8) Your firm is considering investing in one of two mutually exclusive projects.

Question

8) Your firm is considering investing in one of two mutually exclusive projects. Project A requires an initial outlay of $3,500 with expected future cash flows of $2,000 per year for the next three years. Project B requires an initial outlay of $2,500 with expected future cash flows of $1,500 per year for the next two years. The appropriate discount rate for your firm is 12% and it is not subject to capital rationing. Assum¬ing both projects can be replaced with a similar investment at the end of their respec¬tive lives, compute the NPV of the two chain cycle for Project A and three chain cycle for Project B.
a. $2,865 and $94
b. $5,000 and $1,500
c. $3,528 and $136
d. $2,232 and $85

Explanation / Answer

b. $5,000 and $1,500

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