A firm is considering two mutually exclusive projects with the following cash flows: Each project requires an investment of $100,000. The cost of capital is 10 percent.
Which project will have the higher net present value?

Question

A firm is considering two mutually exclusive projects with the following cash flows:  Each project requires an investment of $100,000. The cost of capital is 10 percent.
Which project will have the higher net present value?

Quizplus · Accepted Answer

Project Y has a higher net present value, calculated as:
NPV(Y) = (-100,000) + (30,000 / 1.1) + (35,000 / 1.1^2) + (40,000 / 1.1^3) = $10,126. Project X has a net present value of:
NPV(X) = (-100,000) + (25,000 / 1.1) + (30,000 / 1.1^2) + (35,000 / 1.1^3) + (40,000 / 1.1^4) = $3,779. Since Project Y has a higher net present value, it is the better choice.

A Firm Is Considering Two Mutually Exclusive Projects with the Following