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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.

Answer & Explanation Solved by verified expert
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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Transcribed Image Text

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.

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