You are considering two independent projects that have differing requirements. P

Question

You are considering two independent projects that have differing requirements. Project A has a required return of 12 percent compared to Project B’s required return of 13.5 percent. Project A costs $75,000 and has cash flows of $21,000, $49,000, and $12,000 for Years 1 to 3, respectively. Project B has an initial cost of $70,000 and cash flows of $15,000, $18,000, and $41,000 for Years 1 to 3, respectively. Given this information, you should: 1. accept both Project A and Project B. 2. accept Project A and reject Project B. 3. accept Project B and reject Project A. 4. reject both Project A and Project B. 5. accept whichever one you want but not both.

Explanation / Answer

Project A initial cost=$ 75000 required rate=12% cash flow y1 $ 21000 y2 $ 49000 y3 $ 12000

NPV= -75000+21000(0.893)+49000(0.797)+12000(0.712)

-75000+18753+39053+8544

-75000+66350= -8650

Project B Initial cost =$ 70000 RR=13.50 cash flow 1 y=$ 15000 y2=$ 18000 y3= $ 41000

NPV -70000+15000(0.8811)+18000(0.7763)+41000(0.6839)

-70000+13216.50+13973.40+28039.90

-70000+55229.80=-14770.20

4) reject both project A and B

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