Garage, Inc., has identified the following two mutually exclusive projects: Year

Question

Garage, Inc., has identified the following two mutually exclusive projects:

Explanation / Answer

Rate of return 12.00% Case -> A B A-B Better option by this decision rule Formula Year Cash flow PV of cash flow Cash flow PV of cash flow Cash flow PV of cash flow Cash flow PV of Cash flow 0 -30,000 $ (30,000.00) -30,000 $(30,000.00) 0 $            -   A A/(1+r)^0 1 15,400 $   13,750.00 4,800 $   4,285.71 10,600 $   9,464.29 B B/(1+r)^1 2 13,300 $   10,602.68 10,300 $   8,211.10 3,000 $   2,391.58 C C/(1+r)^2 3 9,700 $     6,904.27 16,200 $ 11,530.84 -6,500 $ (4,626.57) D D/(1+r)^3 4 5,600 $     3,558.90 17,800 $ 11,312.22 -12,200 $ (7,753.32) E E/(1+r)^4 NPV NPV(A) $     4,815.85 NPV(B) $   5,339.87 $     (524.02) A Sum of above PVs of cash flow IRR IRR(A)= 20.79% IRR(B)= 18.71% Answer c = 14.02% A r if npv = 0 a3 This decision is not necessarily correct

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