Projects A and B are mutually exclusive and have an initial cost of $82,000 each. Project A provides cash inflows of $34,000 a year for three years while Project B produces a cash inflow of $115,000 in Year 3. Which project (s) should be accepted if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent?

Question

Business

Gwendolyn Johnson

29 September, 19:11

Projects A and B are mutually exclusive and have an initial cost of $82,000 each. Project A provides cash inflows of $34,000 a year for three years while Project B produces a cash inflow of $115,000 in Year 3. Which project (s) should be accepted if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent?

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Roselyn Simon · Answer 1

If discount rate is 11.7% Project B should be accepted.

If discount rate is 13.5% both projects should be rejected

Explanation:

If the Net present value of Project A is higher than that of project B, we will accept project A and vice versa.

Under 11.7% Discount Rate

Net Present Value-Project A = - 82000 + 34000 / 1.117 + 34000 / 1.117² + 34000 / 1.117³ = $85.099

Net Present Value-Project B = - 82000 + 115000 / 1.117³ = $516.029

Project B should be accepted as it has a higher NPV.

Under 13.5% Discount Rate

Net present Value-Project A = - 82000 + 34000 / 1.135 + 34000 / 1.135² + 34000 / 1.135³ = - $2397.49

Net Present Value-Project B = - 82000 + 115000 / 1.135³ = - $3347.91

Both projects should be rejected as both have negative NPVs