Consider the folowing cash lows on twe mubully achsive projects Year Project A P

Question

Consider the folowing cash lows on twe mubully achsive projects Year Project A Project B 53,000 68,000 33,000 32,000 28,000 41,000 23,000 44,000 2 The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 2 percent Calculate the NPV for each project. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV Project A Project B $24574.71 Which project should you choose? O ProjectA Project B

Explanation / Answer

NPV OF PROJECT A : $ 17420.74

NPV OF PROJECT B : $ 24574.71

WE WILL CHOOSE PROJECT B SINCE NPV OF PROJECT B IS HIGHER

Real Rate = Nominal Rate - Inflation Rate Real Rate = 12% - 2% = 10% PROJECT A- AT REAL RATE Year Project Cash Flows (i) DF@ 10% (ii) PV of Project A ( (i) * (ii) ) 0 -53000 1                    (53,000.00) 1 33000 0.909                     30,000.00 2 28000 0.826                     23,140.50 3 23000 0.751                     17,280.24 CASH INFLOW                     17,420.74 PROJECT B- AT NOMINAL RATE Year Project Cash Flows (i) DF@ 12% (ii) PV of Project B ( (i) * (ii) ) 0 -68000 1                    (68,000.00) 1 32000 0.893                     28,571.43 2 41000 0.797                     32,684.95 3 44000 0.712                     31,318.33 CASH INFLOW                     24,574.71

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