contestada

Which mutually exclusive project would you select, if both are priced at $1,000 and your required return is 15%: Project A with three annual cash flows of $1,000; or Project B, with 3 years of zero cash flow followed by 3 years of $1,500 annually? Project A Project B Neither project should be selected. You are indifferent since the NPVs are equal.

Respuesta :

Answer:

Project A

Explanation:

Mutually exclusive projects are projects that cannot be executed together. Therefore, only one has to be chosen. To decide which one to choose between Project A and Project, we have to calculate their net present value as follows:

Calculation of NPV of Project A

Year (n)   Cash Flow ($)   DF = 1/(1.15)^n         PV ($) 

Year 0       (1,000.00)             1.0000            (1,000.00)

Year 1        1,000.00             0.8696                 869.57  

Year 2        1,000.00              0.7561                  756.14  

Year 3        1,000.00             0.6575                  657.52  

                                               Project A NPV = 1,283.23

Calculation of NPV of Project B

Year (n)   Cash Flow ($)     DF = (1.15)^n        PV ($) 

Year 0       (1,000)                  1.0000            (1,000.00)

Year 1             0                      0.8696                  0  

Year 2            0                       0.7561                   0  

Year 3             0                      0.6575                  0    

Year 4        1,500                      0.5718              857.63  

Year 5        1,500                     0.4972              745.77  

Year 6        1,500                     0.4323              648.49  

                                             Project B NPV = 1,251.89

Since the $1,283.23 net present value (NPC) of Project A is greater than the $1,251.89 NPV of project B, project A should be chosen.

Cash flow is termed as the income and outgo process of the transactions that take in the firm during the transactions or the daily activities in the companies.  

The correct answer is Project A

The calculation of the net present value of the project A and project B are as follows:

 

Calculation of NPV: Project A:

Year (n)   Cash Flow ($)   DF =[tex]\frac{1}{1.15^{n} }[/tex]        PV ($)  

Year 0       (1,000.00)             1.0000            (1,000.00)  

Year 1        1,000.00             0.8696                 869.57    

Year 2        1,000.00              0.7561                  756.14    

Year 3        1,000.00             0.6575                  657.52  

Project A: NPV = 1,283.23

Calculation of NPV: Project B:

Year (n)   Cash Flow ($)     DF = [tex](1.15)^{n}[/tex]        PV ($)  

Year 0       (1,000)                  1.0000            (1,000.00)  

Year 1             0                      0.8696                  0    

Year 2            0                       0.7561                   0    

Year 3             0                      0.6575                  0      

Year 4        1,500                      0.5718              857.63    

Year 5        1,500                     0.4972              745.77    

Year 6        1,500                     0.4323              648.49  

Project B: NPV = 1,251.89

Project A should be selected because its $1,283.23 net present value is greater than Project B's $1,251.89.

To know more about the calculation of the net present value, refer to the link below:

https://brainly.com/question/14090991

Otras preguntas