Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why?
A) Project A, because it has the higher required rate of return.
B) Project A, because it has the larger NPV.
C) Project B, because it has the largest cash inflow in Year 1.
D) Project B, because it has the higher required rate of return.
E) Project B, because it has the larger NPV

Question

Quizplus · Accepted Answer

To determine which project should be accepted, we need to compare their NPVs. NPV of Project A = -$47,500 + $25,300/(1+0.147) + $37,100/(1+0.147)^2 + $22,000/(1+0.147)^3 = $2,757.58. NPV of Project B = -$47,500 + $43,600/(1+0.149) + $19,800/(1+0.149)^2 + $10,400/(1+0.149)^3 = $7,354.52. Since Project B has a larger NPV, it should be accepted.

Two Mutually Exclusive Projects Have an Initial Cost of $47,500