Question 7: (15 points) (Mutually exclusive projects and NPV) You have been assi

Question

Question 7: (15 points) (Mutually exclusive projects and NPV) You have been assigned the task of evaluating two mutually exclusive projects with the following projected cash flows:

Year Project A Cash Flow Project B cash Flow   

0 (110,000) (110,000)

1 30,000 0

2   30,000 0

3 30,000 0

4   30,000 0

5 30,000 210,000  

If the appropriate discount rate on these projects is 11 percent, which would be chosen and why? (Round to the nearest cent.)

a. The NPV of Project A is: $

b. The NPV of Project B is: $ Which project would be chosen and why? (Select the best choice below.)

a. Cannor choose without comparing their IRRs.

b. Choose A because its NPV is higher.

c. Choose both because they both have positive NPVs.

d. Choose B because its NPV is higher.

Explanation / Answer

NPV of Project A= -$ 110,000+$ 30,000(PVAF11%,5)

-$ 110,000+30,000(3.696)= $ 880

NPV of project B= -$ 110,000+$ 210,000(PVIF11%,5)

-$ 110,000+$ 210,000(1.685)=$ 243,850

d) choose because the NPV of project B is higher

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