Suppose your firm is considering two mutually exclusive, required projects with
ID: 2787460 • 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
accept both A and B
reject A, accept B
accept A, reject B
accept neither A nor 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
NPV is calculated by discounting the cashflows
PV = C/(1+r)^n
C - Cashflow
r - Discount rate
n - years to the cashflow
Project A:
NPV = -25000 + 15000/(1+0.08)^1 + 35000/(1+0.08)^2 + 6000/(1+0.08)^3 = $23658.74
Project B:
NPV = -35000 + 15000/(1+0.08)^1 + 25000/(1+0.08)^2 + 55000/(1+0.08)^3 = $43983.13
Accept both A and B, as the NPV is positive for both the projects.
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