Given the following projects each of which requires investing $8,000 today and g

Question

Given the following projects each of which requires investing $8,000 today and given a 9% discount rate, A= yr 1 $500, 2 $500, 3 $7,000, 4 $2,000 B= yr 1 $600, 2 $2000, 3 $6000, 4 $1000 C= yr 1 $2000, 2 $5000, 3 $7000, 4 $5000 D= yr 1 $2000, 2 $5000, 3 $6000, 4 $6000 1. which of the following projects would be chosen, if the projects are mutually exclusive? 2. if you had only $16000 to invest, and the projects are not mutually exclusive, which two projects would you choose? 3. How would your answers change if the discount rate changed from 9% to 10%? SHOW WORK Please

Explanation / Answer

NPV of A is -8000 + 500/1.09 + 500/1.09^2 + 7000/1.09^3 + 2000/1.09^4 = -298

B = -8000 + 600/1.09 + 2000/1.09^2 + 6000/1.09^3 + 1000/1.09^4 = -425

C is -8000 + 2000/1.09 + 5000/1.09^2 + 7000/1.09^43+ 5000/1.09^4 = 6991

D is -8000 + 2000/1.09 + 5000/1.09^2 + 6000/1.09^3 + 6000/1.09^4 = 6927

Hence we would go with projects C and D, even if the limit is 16000 or not.

If the Interest rate is 10%

NPV of

A is -507

B is -610

C is 6625

D is 6556

Hence we would still go with C and D if the limit of 16,000 is applicable or not

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