Consider two mutually exclusive projects with the following cash flows: Project
ID: 2383656 • Letter: C
Question
Consider two mutually exclusive projects with the following cash flows:
Project
C/F0
C/F1
C/F2
C/F3
C/F4
C/F5
C/F6
A
$(41,215)
$12,500
$14,000
$16,500
$18,000
20,000
N/A
B
$(46,775)
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
Assuming that the discount rate for project A is 16% and the discount rate for B is 15%, then given that these are mutually exclusive projects, which project would you take and why?
Project
C/F0
C/F1
C/F2
C/F3
C/F4
C/F5
C/F6
A
$(41,215)
$12,500
$14,000
$16,500
$18,000
20,000
N/A
B
$(46,775)
$15,000
$15,000
$15,000
$15,000
$15,000
$15,000
Explanation / Answer
Project A
NPV = -41215 + 12500/1.16 + 14000/1.16^2 + 16500/1.16^3 + 18000/1.16^4 + 20000/1.16^5
NPV = $ 9999.49
PVA(16%,5) = 3.274294
Equivalent Annual Benefit = NPV of Project A/PVA(16%,5)
Equivalent Annual Benefit = 9999.49/3.274294
Equivalent Annual Benefit = $ 3053.94
Project B
PVA(15%,6) = 3.784483
NPV = -46775 + 15000*PVA(15%,6)
NPV = -46775 + 15000*3.784483
NPV = $ 9992.25
Equivalent Annual Benefit = NPV of Project B/PVA(15%,6)
Equivalent Annual Benefit = 9992.25/3.784483
Equivalent Annual Benefit = $ 2650.32
Decision : Project A should be selected as its Equivalent Annual Benefit is higher than Project B