Show all working Question 4 Consider the following two mutually exclusive servic
ID: 1158274 • Letter: S
Question
Show all working Question 4 Consider the following two mutually exclusive service projects with project lives of 3 years and 2 vears, respectively. They will have identical revenues for each year of service. You know the be 12%. If the required service period is 6 years, and both projects can be repeated interest rate to with the given costs and better service projects are unavailable in the future, which project is better and why? Net cash flow, $ End of year 0. Project A Project B 1,000 400 400 -800 200 200 + 0 salvage 400+200 salvage (15 marks)Explanation / Answer
Net Present Value(NPV) of Project A:
=[-1000/(1+0.12)^0]+[-400/(1+0.12)^1]+[-400/(1+0.12)^2]+[(-400+200)/(1+0.12)^3]
=-1000-357.14-318.88-142.36
=-$1818.38
NPV of Project B
=[-800/(1+0.12)^0]+[-200/(1+0.12)^1]+[-200/(1+0.12)^2]
=-800-178.57-160
=-$1138.57
In both the projects, the NPV obtained is negative. Therefore, in such a case the project with lower NPV is chosen to minimize the cost i.e Project B.