Acorn Co is looking at two mutually exclusive investments. The cash flow details
ID: 2797094 • Letter: A
Question
Acorn Co is looking at two mutually exclusive investments. The cash flow details of each Project are shown in the following table.
Expected Net Cash Flow
Year
Project A
Project B
0
(300)
(405)
1
(387)
134
2
(193)
135
3
(100)
136
4
600
134
5
600
135
6
850
136
7
(180)
0
Acorn has a cost of capital of 7.5%. Should they select project A or B? Why?
If the Hurdle rate for Project B is 17.5%, would this make any difference in Acorn Co’s decision making? Why or why not?
Expected Net Cash Flow
Year
Project A
Project B
0
(300)
(405)
1
(387)
134
2
(193)
135
3
(100)
136
4
600
134
5
600
135
6
850
136
7
(180)
0
Explanation / Answer
Formula for NPV in excel = =F8+NPV(0.075,F9:F15) where f9 to f15 are the cash flows
Since NPV of project A is higher, it should be selected
If hurdle rate for project B is 17.5%, it has achived a higher return than this i.e. 24.25%, however when NPV and IRR are not is agreement NPV shall be given preference hence project A shall be selected even if hurdle rate is 17.5%
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