Suppose your firm is considering two mutually exclusive, required projects with

Question

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively. Time: 0 1 2 3 Project A Cash Flow -39,000 29,000 49,000 20,000 Project B Cash Flow -49,000 29,000 39,000 69,000 Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected? rev: 12_04_2012 accept both A and B accept A, reject B reject A, accept B accept neither A nor B

Explanation / Answer

Project A Project B Year Cash flow PV factor @ 12% Cash flow Year Cash flow PV factor @ 12% Cash flow 0 -39000 1 -39000 0 -49000 1 -49000 1 29000 0.8928571 25892.86 1 29000 0.892857 25892.86 2 49000 0.7971939 39062.5 2 39000 0.797194 31090.56 3 20000 0.7117802 14235.6 3 69000 0.71178 49112.84 NPV 40190.96 NPV 57096.26 Accept Both Project A & B Because NPV > 0

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