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Carol, Inc. is considering three different independent investment opportunities. The present value of future cash flows, initial investment, and net present value for each of the projects are as follows
Project A Project B Project C
Present value of future cash flows $300,000 $250,000 $275,000
Initial investment Net present value 105.000/150,000 50.000/$145,000 140.000/$135,000
In what order should Carol prioritize investment in the projects?
A. A, C, B
B. B, C, A
C. A, B, C
D. B, A, C

Respuesta :

Answer:

C. A, B, C

Explanation:

Note: The data in the question are merged together and they are thefore sorted before answering the question as follows:

                                             Project A        Project B         Project C

PV of future cash flows      $300,000       $250,000        $275,000

Initial investment                 (150,000)          (105,000)        (140,000)  

Net present value              $150,000         $145.000       $135,000  

The expanation to the answer is now given as follows:

As it can be seen from the data above, net present value (NPV) is obtained by deducting the initial investment from the present value (PV) of cash flow of an investment.

When NPV is used to assess the profitability of more one planned projects, the decision criterion is to implement investments that have positive NPV the order of the magnitude of their positive net present value (NPV).

From the data above, Project A has the highest NPV of $150,000 and it will be implemented first followed by Project B with the second highest NPV of $145,000 and lastly Project C with the least positive NPV of $135,000.

Therefore, Carol prioritize investment in the projects in the order C. A, B, C.

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