Question

18. Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 9 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.

Time:	0	1	2	3
Project A Cash Flow	-21,000	11,000	31,000	2,000
Project B Cash Flow	-31,000	11,000	21,000	51,000

Use the NPV decision rule to evaluate these projects; which one(s) should it be accepted or rejected?

Answer 1

The NPV of project A is computed as shown below:

= - 21,000 + 11,000 / 1.09 + 31,000 / 1.09² + 2,000 / 1.09³

= 16,728.19 Approximately

The NPV of project B is computed as shown below:

= - 31,000 + 11,000 / 1.09 + 21,000 / 1.09² + 51,000 / 1.09³

= 36,148.38 Approximately

Since the NPV of project B is higher than the NPV of project A, hence project B shall be accepted.

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