6. The following cash flows are give for the two mutually exclusive projects X a

Question

6. The following cash flows are give for the two mutually exclusive projects X and Y. The project X requires an initial investment of $15,000 in time '0' and project Y needs an initial investment of $12,000 in time '0'. Year Project X Project Y 1 $4,500 $9,000 2 6,000 5,000 3 7,500 4.500 4 9,000 3,000 5 8,000 2,000 6 5,000 2,000 (a) Calculate the NPV for each project using a discount rate of 14%. (b) State your accept/reject decision (c) What would be your decision if they were to be independent projects.

Explanation / Answer

Enter the cash flows in an excel sheet as follows

a) NPV of these projects can be calculated as below

Project X = NPV(14%,B2:B8) = $9,112.34

Project Y = NPV(14%,C2:C8) = $5,706.66

b) Since NPV of project X is more than project Y, and also given that they are mutually exclusive projects, we will accept project X.

c) If they are independent projects, we can accept both the projects since both have positive NPV's

Year Project X Project Y 0 -15000 -12000 1 4500 9000 2 6000 5000 3 7500 4500 4 9000 3000 5 8000 2000 6 5000 2000

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