Suppose your firm is considering two mutually exclusive, required projects with
ID: 2765865 • Letter: S
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 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?
rev: 12_04_2012
reject A, accept B
accept both A and B
accept neither A nor B
accept A, reject B
Time: 0 1 2 3 Project A Cash Flow -25,000 15,000 35,000 6,000 Project B Cash Flow -35,000 15,000 25,000 55,000Explanation / Answer
reject A, accept B Statement showing Cash flows Project A Project B Particulars Time PVf@8% Amount PV Amount PV Cash Outflows - 1.00 (25,000.00) (25,000.00) (35,000.00) (35,000.00) PV of Cash outflows = PVCO (25,000.00) (35,000.00) Cash inflows 1.00 0.9259 15,000.00 13,888.89 15,000.00 13,888.89 Cash inflows 2.00 0.8573 35,000.00 30,006.86 25,000.00 21,433.47 Cash inflows 3.00 0.7938 6,000.00 4,762.99 55,000.00 43,660.77 PV of Cash Inflows =PVCI 48,658.74 78,983.13 NPV = PVCI - PVCO 23,658.74 43,983.13 Since projects are mutually exclusive therefoe project with higher NPV would be seleccted
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