Wilson\'s Market is considering two mutually exclusive projects that will not be

Question

Wilson's Market is considering two mutually exclusive projects that will not be repeated. The required rate of return is 13.9 percent for Project A and 12.5 percent for Project B. Project A has an initial cost of $54,500, and should produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $69,400, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. Which project, or projects, if either, should be accepted and why? Project A; because it has the higher required rate of return neither project; because neither has an NPV equal to or greater than its initial cost Project A; because its NPV is positive while Project B's NPV is negative Project B; because it has the largest total cash inflow Project B; because it has a negative NPV which indicates acceptance

Explanation / Answer

Solution:

We need to find the net present value of the project and then divided by the discount value to decide which project to be selected

Project A net present value :

Project B :

Since the net present value of the project B is negative hence the project A should be selected

Hence the answer is Option C Project A should be selected because the NPV is positive for project A and negative for project B Thank you.

Years Cash flow formula Discount 13.9% Present value 0 -54500 1 1 -54500.000 1 16400 1/1.139^1 0.878 14398.595 2 28900 1/1.139^2 0.771 22276.676 3 31700 1/1.139^3 0.677 21453.003 Net present value 3628.274

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.