Project Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Discount Rate A - 100 40 50 60 N/A. 15 B - 73 30 30 30 30.15 22. a) Assume that projects A and B are mutually exclusive. What is the correct investment decision and why? Show your calculations for full credit.

The answer is: You should invest in Project B since it has a higher NPV ($12.65) than Project A ($12.04)

Explanation:

Using an excel spreadsheet we can determine the net present value (NPV function) of the cash flows associated with each project.

Project A Project B

40 30

50 30

60 30

0 30

discount rate for both projects = 15%

NPV Project A's cash flows = $112.04 minus the amount invested (100) = $12.04

NPV Project B's cash flows = $85.65 minus the amount invested (73) = $12.65