Sentry Oil Inc. is considering two mutually exclusive projects as follows: Sentry's a cost of capital is 14%. It can spend no more than $350,000 on capital projects this year, which of the following statements is applicable when evaluating the projects by the NPV method?

Question

Quizplus · Accepted Answer

In order to evaluate the projects by the NPV method, we need to calculate the NPV of each project.

For Project A: 
NPV = -$300,000 + ($150,000/1.14) + ($170,000/1.14^2) + ($190,000/1.14^3) + ($210,000/1.14^4) 
NPV = $57,206.06

For Project B: 
NPV = -$350,000 + ($90,000/1.14) + ($120,000/1.14^2) + ($150,000/1.14^3) + ($180,000/1.14^4) 
NPV = $26,800.28

Since Project A has a higher NPV than Project B, it appears to add more shareholder wealth and should be done. Therefore, the best choice is C.