Project A has an initial cost of $50,000 and provides cash inflows of $21,000 a
ID: 2802689 • Letter: P
Question
Project A has an initial cost of $50,000 and provides cash inflows of $21,000 a year for three years. Project B has an initial cost of $45,000 and produces cash inflows of $19,000 a year for year three years. The projects are mutually exclusive. Which project(s) should you accept if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent?
Select one:
A. Accept B as it always has the higher NPV.
B. Accept B at 11.7 percent and neither at 13.5 percent.
C. Accept A at 11.7 percent and B at 13.5 percent.
D. Accept A as it always has the higher NPV.
E. Accept B at .11.7 percent and A at 13.5 percent.
Explanation / Answer
Ans. B Accept B at 11.7 percent and neither at 13.5 percent. Explanation: Project B is accepted (on 11.7%) because the NPV of Project B is higher than Project A. The discount rate of 13.5% is not accepted because it has a negative net present value. PROJECT NPV @ 11.7% NPV @ 13.5% A 699.62 -833.74 B 871.08 -516.24
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