Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why

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Karabo99 Karabo99 · Answer 1 · 2019-11-08T20:10:35+01:00

Answer:

The project that should be accepted is Project A, because it has the larger Net Present Value.

Explanation:

Net Present Value (NPV) – Project A

Year Cash Flow Present Value factor Present Value of Cash Flow

1 25,300.00 0.871840 22,057.54

2 37,100.00 0.760104 28,199.87

3 22,000.00 0.662689 14,579.16

TOTAL $64,836.57

Net Present Value of the Project = Total Present value of cash inflows – Initial Investment

= $64,836.57 – 47,500

= $17,336.57

Net Present Value (NPV) – Project B

Year Cash Flow Present Value factor Present Value of Cash Flow

1 43,600.00 0.870322 37,946.04

2 19,800.00 0.757460 14,997.72

3 10,400.00 0.659234 6,856.04

TOTAL $ 59,799.79

Net Present Value of the Project = Total Present value of cash inflows – Initial Investment

= $59,799.79 – 47,500

= $12,299.79

Therefore, The project that should be accepted is Project A, because it has the larger Net Present Value.