Cooper Woodworking is considering two projects, both of which have an initial co
ID: 2790954 • Letter: C
Question
Cooper Woodworking is considering two projects, both of which have an initial cost of $65,000 and total cash inflows of $80,000. The cash inflows of project A are $10,000, $15,000, $25,000, and $30,000 over the next four years, respectively. The cash inflows for project B are $30,000, $25,000, $15,000, and $10,000 over the next four years, respectively. Which one of the following statements is correct if Cooper requires a 10.5 percent rate of return and also has a required payback period of 4 years? Both projects should be accepted. Both projects should be rejected. Project A should be accepted and project B should be rejected Project A should be rejected and project B should be accepted You should be indifferent to accepting either or both projects.Explanation / Answer
NPV of project A=-65000+10000/1.105^1+15000/1.105^2+25000/1.105^3+30000/1.105^4=-5014.37
NPV of project B=-65000+30000/1.105^1+25000/1.105^2+15000/1.105^3+10000/1.105^4=448.70
payback period for project A=3 years+(65000-50000)/30000=3.5 years
payback period for project B=2 years+(65000-55000)/15000=2.67 years
project A should be rejected and project B should be accepted.
because B has positive and higher NPV.
the above is the answer