Two investment projects which are mutually exclusive both require a $10,000,000 investment. Projected cash flows are: Year Project A Project B 1 $3,500,000 ...

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Finance

Two investment projects which aremutually exclusive both require a $10,000,000 investment. Projectedcash flows are:
                                   Year            ProjectA          Project B
                                      1            $3,500,000        $6,500,000
                                      2              3,500,000         3,000,000
                                      3              3,500,000         3,000,000
                                      4              3,500,000         1,000,000
If your discount rate is 12 percent,net present value each project and indicate which you would chooseand why.

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4.4 Ratings (795 Votes)

Ans Choose PROJECT B since it has higher NPV than Project A

Year	Project Cash Flows (i)	DF@ 12%	DF@ 12% (ii)	PV of Project A ( (i) * (ii) )
0	-10000000	1	1	(1,00,00,000.00)
1	3500000	1/((1+12%)^1)	0.893	31,25,000.00
2	3500000	1/((1+12%)^2)	0.797	27,90,178.57
3	3500000	1/((1+12%)^3)	0.712	24,91,230.87
4	3500000	1/((1+12%)^4)	0.636	22,24,313.27
		NPV		6,30,722.71

Year	Project Cash Flows (i)	DF@ 12%	DF@ 12% (ii)	PV of Project B( (i) * (ii) )
0	-10000000	1	1	(1,00,00,000.00)
1	6500000	1/((1+12%)^1)	0.893	58,03,571.43
2	3000000	1/((1+12%)^2)	0.797	23,91,581.63
3	3000000	1/((1+12%)^3)	0.712	21,35,340.74
4	1000000	1/((1+12%)^4)	0.636	6,35,518.08
		NPV		9,66,011.88

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Two investment projects which aremutually exclusive both require a $10,000,000 investment. Projectedcash flows are: Year ProjectA Project B 1 $3,500,000 $6,500,000 2 3,500,000 3,000,000 3 3,500,000 3,000,000 4 3,500,000 1,000,000If your discount rate is 12 percent,net present value each project and indicate which you would chooseand why.