Projects A and B both have an initial outflow of $100,000.Project A will return a cash flow of $30,000 each year for the next 5 years.Project B will return $40,000 in year 1, $30,000 in year 2, $30,000 in year 3, $30,000 in year 4, and $20,000 in year 5.Which project will have the higher net present value?

Question

Quizplus · Accepted Answer

To calculate the net present value, we need to discount each cash flow to its present value and add them up. Assuming a discount rate of 10%, the net present value of Project A is:

Year 1: $30,000 / (1 + 0.10)^1 = $27,273
Year 2: $30,000 / (1 + 0.10)^2 = $24,794
Year 3: $30,000 / (1 + 0.10)^3 = $22,540
Year 4: $30,000 / (1 + 0.10)^4 = $20,487
Year 5: $30,000 / (1 + 0.10)^5 = $18,614

NPV(A) = $27,273 + $24,794 + $22,540 + $20,487 + $18,614 - $100,000 = $13,708

The net present value of Project B is:

Year 1: $40,000 / (1 + 0.10)^1 = $36,364
Year 2: $30,000 / (1 + 0.10)^2 = $24,794
Year 3: $30,000 / (1 + 0.10)^3 = $22,540
Year 4: $30,000 / (1 + 0.10)^4 = $20,487
Year 5: $20,000 / (1 + 0.10)^5 = $14,892

NPV(B) = $36,364 + $24,794 + $22,540 + $20,487 + $14,892 - $100,000 = $19,077

Therefore, Project B has a higher net present value than Project A.

Projects a and B Both Have an Initial Outflow of $100,000.Project