Table 12.6
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent.
-The NPVs of Projects A and B are ________. (See Table 12.6)
A) $95,066 and $56,386, respectively
B) $56,386 and $95,066, respectively
C) -$56,386 and -$95,066, respectively
D) $45,000 and $650,000, respectively

Question

Table 12.6
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. 
-The NPVs of Projects A and B are ________. (See Table 12.6)
A) $95,066 and $56,386, respectively 
B) $56,386 and $95,066, respectively 
C) -$56,386 and -$95,066, respectively 
D) $45,000 and $650,000, respectively

Quizplus · Accepted Answer

To calculate the NPV of Project A:
NPV = -50,000 + (10,000/1.1) + (10,000/1.1^2) + … + (10,000/1.1^5) + (20,000/1.1^5)
NPV = $95,066.04

To calculate the NPV of Project B:
NPV = -150,000 + (30,000/1.1) + (30,000/1.1^2) + … + (30,000/1.1^4) + (200,000/1.1^4)
NPV = $56,386.05

Since both NPVs are positive, both projects are expected to generate positive returns. However, Project A has a higher NPV, making it the better choice.

Table 12.6 Yong Importers, an Asian Import Company, Is Evaluating Two Mutually