AA firm is evaluating two projects that are mutually exclusive with initial inve
ID: 2696698 • Letter: A
Question
AA firm is evaluating two projects that are mutually exclusive with initial
investments and cash flows as follows:
Project: A Project: B
_____________________________ _____________________________
Initial End?of?Year Initial End?of?Year
Investment Cash Flows Investment Cash Flows
?????????? ?????????? ?????????? ??????????
$40,000 20,000 $90,000 $40,000
20,000 40,000
20,000 80,000
The financial analyst determines that the firm's required rate of return is 15%. His recommendation using NPV would be to
A. select both
B. select project A and reject B.
C. reject project A and select B.
Explanation / Answer
Hi,
Please find the answer as follows:
NPV
Project A = - 40000 + 20000/(1+.15)^1 + 20000/(1+.15)^2 + 20000/(1+.15)^3 = 5664.50
Project B = - 90000 + 40000/(1+.15)^1 + 40000/(1+.15)^2 + 80000/(1+.15)^3 = 27629.50
Since NPV of both the projects is +, Both the projects can be selected.
Therefore, option A is correct.
Thanks.