Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4,...
Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4, respectively. Project B has cash flows of $2,000, $3,000, $2,000, and $3,000 for Years 1 to 4, respectively. Which one of the following statements is correct assuming the discount rate is positive? (No calculations needed)
Multiple Choice
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The cash flows for Project B are an annuity, but those of Project A are not.
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Both sets of cash flows have equal present values as of Time 0.
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The present value at Time 0 of the final cash flow for Project A will be discounted using an exponent of three.
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Both projects have equal values at any point in time since they both pay the same total amount.
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Project B is worth less today than Project A.
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Homework Answers
ANSWER: PROJECT B IS WORTH LESS TODAY THAN PROJECT A
(ANSWER IS CONFIRMED ON THE BASIS OF FOLLOWING CALCULATION)
ASSUMED DISCOUNT RATE @10%
PV CALCULATED AS FOLLOW
| PROJECT A | PROJECT B | |||||
| YEAR | CASH INFLOW | TAKING PV @10% | CASH INFLOW | TAKING PV @10% | ||
| 1 | 4000 | 0.909 | 3636 | 2000 | 0.909 | 1818 |
| 2 | 3000 | 0.826 | 2478 | 3000 | 0.826 | 2478 |
| 3 | 0 | 0.751 | 0 | 2000 | 0.751 | 1502 |
| 4 | 3000 | 0.683 | 2049 | 3000 | 0.683 | 2049 |
| TOTAL PRESENT VALUE | 6114 | 5798 | ||||
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