Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive?
A) Accept Project A and reject Project B
B) Reject Project A and accept Project B
C) Accept both projects
D) Reject both projects
E) Accept either one, but not both

Question

Quizplus · Accepted Answer

To determine which project to accept, we need to calculate the net present value (NPV) of each project using their respective required return rates.

For Project A:
NPV = -$87,000/(1+0.092)^0 + $32,600/(1+0.092)^1 + $35,900/(1+0.092)^2 + $43,400/(1+0.092)^3
NPV = -$87,000 + $29,879.46 + $29,168.66 + $31,329.07
NPV = $3,377.19

For Project B:
NPV = -$85,000/(1+0.127)^0 + $14,700/(1+0.127)^1 + $21,200/(1+0.127)^2 + $89,800/(1+0.127)^3
NPV = -$85,000 + $12,991.15 + $16,553.40 + $60,422.16
NPV = $4,966.71

Since Project B has a higher NPV than Project A, we should accept Project B and reject Project A. Therefore, the correct answer is B.

Project a Has a Required Return on 9