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rojects A and B are mutually exclusive and have an initial cost of $78,000 each. Project A provides cash inflows of $32,000 a year for three years while Project B produces a cash inflow of $44,400 a year for two years. Which project(s) should be accepted if the discount rate is 10 percent

Respuesta :

Answer:

Project A should be accepted.

Explanation:

The initial investment of project A = $78000

The initial investment of project B = $78000

The cash inflows of project A = $32000

The time period for project A = 3 years

The cash inflow of project B = $44400

The time period for project B = 2 years.

Interest rate (r ) = 10%

Now find the net present value of both project and then decide which one has to accept.

The net present value of project A:

[tex]=\frac{A(1-(1+r)^{-n})}{r} - \text{initial investment} \\= \frac{32000(1-(1+0.1)^{-3})}{0.1} - 78000 \\= 79579.26 – 78000 \\= $1579.26[/tex]

The net present value of project B:

[tex]=\frac{A(1-(1+r)^{-n})}{r} - \text{initial investment} \\= \frac{44400(1-(1+0.1)^{-2})}{0.1} - 78000 \\= - 942.14[/tex]

Project A should be accepted because project B has a negative net present value.

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