Interstate Appliance Inc.is considering the following 3 mutually exclusive projects.Projected cash flows for these ventures are as follows:

If Interstate Appliance has a 12% cost of capital,what decision should be made regarding the projects above?
A) accept plan A
B) accept plan B
C) accept plan C
D) accept Plans A, B and C

Question

Interstate Appliance Inc.is considering the following 3 mutually exclusive projects.Projected cash flows for these ventures are as follows:

If Interstate Appliance has a 12% cost of capital,what decision should be made regarding the projects above?
A) accept plan A 
B) accept plan B 
C) accept plan C 
D) accept Plans A, B and C

Quizplus · Accepted Answer

To determine the best project, we need to calculate the present value of each project's cash flows and compare them to their initial investment. Using a 12% discount rate, the calculations are as follows:

Plan A: 
Initial investment: $80,000
PV of cash flows: $27,290

Plan B:
Initial investment: $120,000
PV of cash flows: $37,994

Plan C:
Initial investment: $200,000
PV of cash flows: $77,898

As we can see, Plan C has the highest present value of cash flows and is greater than its initial investment. Therefore, the best choice is to accept Plan C.