(Mutually exclusive projects and NPV) You have been assigned the task of elevati

Question

(Mutually exclusive projects and NPV) You have been assigned the task of elevating tow mutually exclusive projects with the following projected cash flows:

Year Project A Cash Flow

0 -$100,000

1 33,000

2 33,000

3 33,000

4 33,000

5 33,000

Project B Cash Flow

0-$-100,000

Year 1-0

Year 2- 0

Year3- 0

Year 4-0

Year 5- 220000

If the appropriate discount rate on these projects is 10% which would be chosen and why?

What is the NPV for Project A?

What is the NPV for Project B?

What project would be chosen and why?

A. Cannot be chosen without comparing their IRR's.

B. Choose A because the NPV is higher.

C. Chose B because the NPV is higher.

D.Choose both because they both have positive NPV's

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

NPV (Project A) = -100000 + 33000/(1+.10)^1 + 33000/(1+.10)^2 + 33000/(1+.10)^3 + 33000/(1+.10)^4 + 33000/(1+.10)^5 = 25095.96

NPV (Project B) = -100000 + 0 + 0 + 0 + 0 + 220000/(1+.10)^5 = 36602.69

Part B:

Option D (Choose both because they both have positive NPV's) is the correct option.

Thanks.

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