Project A is opening a bakery at 10 Center Street. Project B is opening a specia
ID: 2738689 • Letter: P
Question
Project A is opening a bakery at 10 Center Street. Project B is opening a specialty coffee shop at the same address. Both projects have unconventional cash flows, that is, both projects have positive and negative cash flows that occur following the initial investment. When trying to decide which project to accept, given sufficient funding to accept either, you should rely most heavily on the _____ method of analysis
1. discounted payback 2. internal rate of return 3. payback 4. profitability index 5. net present value
Explanation / Answer
Net Present value method:
When the projects are mutually exclusive or cash flows are unconventional, Net present value method is best to be used. Net present value is the difference between present value of subsequent cash flows and initial investment. It computes net addition to shareholders’ wealth.
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