Two projects each require a current cash expenditure of $10,000.Project A will generate cash inflows of $2,000 per year for the next twelve years.Project B is expected to return $6,000 in 1 year,$4,000 at the end of year 2,and $3,000 in 3 years.Which project should be selected if funds are unavailable to finance both and capital costs are 6%?
A) Project B because it has a shorter payback period.
B) Project B because it has a higher IRR
C) Project A because it has a higher IRR
D) Project A because it has a higher NPV
E) Project B because it has a higher NPV

Question

Quizplus · Accepted Answer

Step 1 - Calculate the NPV for Project A.
Project A can be solved like an annuity, so:
NPV = PMT 11ea7fdb_fbe2_0420_a768_4d9c16011613_TB2902_11 - Initial Investment
NPV = 2,000 11ea7fdb_fbe2_0421_a768_89dc89896fc6_TB2902_11 - 10,000 = $6,767.69
Step 2 - Calculate the NPV for Project B.
NPV = 11ea7fdb_fbe2_2b32_a768_fd0cf5a1f3ca_TB2902_11 11ea7fdb_fbe2_2b33_a768_df6eb634b652_TB2902_11 - Initial Investment
NPV = 11ea7fdb_fbe2_2b34_a768_5724f8f2654f_TB2902_11 + 11ea7fdb_fbe2_2b35_a768_ef3f87815998_TB2902_11 + 11ea7fdb_fbe2_2b36_a768_83b50dc561ee_TB2902_11 - 10,000 = $1,739.22
Accept Project A because it has a higher NPV

Two Projects Each Require a Current Cash Expenditure of $10,000