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20 May, 03:10

Which of the two project below would you pursue, if you based the decision on ROI (Discount rate: 10%) ? Project 1 had a cash flow as follows: Year 0: - 5K, Year 1: 3K, Year 2: 2K, Year 3: 1K Project 2 had a cash flow as follows: Year 0: - 7K, Year 1: 5K, Year 2: 3K, Year 3: 2K

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  1. 20 May, 07:07
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    Project 2 should be accepted as it's net present value (NPV) is higher

    Explanation:

    Project 1

    Year Cash Flows Discounting factor @10% Present Value (in $)

    0 (5000) 1 (5000)

    1 3000 0.909 2727

    2 2000 0.826 1652

    3 1000 0.751 751

    NPV $130

    Year Cash Flows Discounting Factor @10% Present value (in $)

    0 (7000) 1 (7000)

    1 5000 0.909 4545

    2 3000 0.826 2478

    3 2000 0.751 1502

    NPV $1525

    Note: Cash flows in brackets denote cash outflows or negative cash flows.
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