--------------Initial Outlay--------------------------------------- Net Cash Flo

Question

--------------Initial Outlay--------------------------------------- Net Cash Flow Each Period

------------------------------------------------------------1------------------ 2------------------ 3---------------------- 4

Project A ----$4,000-------------------------- $2,003 -----------$2,003----------- $2,003------------- $2,003

Project B---- $4,000-------------------------------------------------------------------------------------------- $10,736

A. Calculate the net present value of each of the above projects, assuming a 14 percent discount rate.

B. If 14 Percent is the required rate of return for these projects, which project is preferred? Why?

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

NPV (Project A) = - 4000 + 2003/(1+.14)^1 + 2003/(1+.14)^2 + 2003/(1+.14)^3 + 2003/(1+.14)^4 = 1836.17

NPV (Project B) = - 4000 + 10736/(1+.14)^4 = 2356.57

Part B:

Since NPV of Project B is higher than that of Project A, Project B should be preferred.

Thanks.

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