Marlin Corporation must decide between two mutually exclusive projects because i
ID: 2420961 • Letter: M
Question
Marlin Corporation must decide between two mutually exclusive projects because it lacks sufficient personnel to complete both projects. Each project takes two years to complete and the project selected will be Marlin's only source of taxable income for the two years. The first job would generate $360,000 of revenues in the first year and $80,000 in the second year. Marlin estimates that this job will incur $200,000 of expenses in the first year and $40,000 of expenses in the second year. The second job will generate $220,000 of revenues and $120,000 of expenses in each of the two years. Assuming a 7 percent discount rate, which project should Marlin accept?
Explanation / Answer
Marlin Corporation (All amounts in $) To understand which project should Marlin accept, we need to work out the Net Present Values of both the projects which they plan to invest in Project 1 Year 1 Year 2 Revenues generated 360000 80000 Expenses incurred 200000 40000 Discount Rate 7% Net Present Value $ 155,901.76 Project 2 Year 1 Year 2 Revenues generated 220000 220000 Expenses incurred 120000 120000 Discount Rate 7% Net Present Value $ 149,888.19 Since the Net Present Value of Project 1 is more than that of Project 2, hence Project 1 should be accepted by Marlin Corporation.