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 on 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 Project A; because its NPV is positive while Project B's NPV is negative Project B: because it has a negative NPV which indicates acceptance Project B; because It has the largest total cash inflow neither project; because neither has an NPV equal to or greater than its initial cost

Explanation / Answer

NPV of Project A:

Year

Cash Flow

PVF (13.9%)

PV of Cash Flow

0

-$54500

1

-$54500

1

$16400

0.87796

$14398.544

2

$28900

0.77082

$22276.698

3

$31700

0.67675

$21452.975

$3628.217

NPV of Project B:

Year

Cash Flow

PVF (12.5%)

PV of Cash Flow

0

-$69400

1

-$69400

1

$0

0.88888

0

2

$48300

0.79012

$38162.796

3

$42100

0.70233

$29568.093

-$1669.111

Project A ; because its NPV is positive while Project B’s NPV is negative.

Year

Cash Flow

PVF (13.9%)

PV of Cash Flow

0

-$54500

1

-$54500

1

$16400

0.87796

$14398.544

2

$28900

0.77082

$22276.698

3

$31700

0.67675

$21452.975

$3628.217

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