Wilson's Market is considering two mutually exclusive projects that will not be repeated.The required rate of return is 13.9 percent for Project A and 12.5 percent for Project B.Project A has an initial cost of $54,500,and should produce cash inflows of $16,400,$28,900,and $31,700 for Years 1 to 3,respectively.Project B has an initial cost of $69,400,and should produce cash inflows of $0,$48,300,and $42,100,for Years 1 to 3,respectively.Which project,or projects,if either,should be accepted and why?
A)Project A; because its NPV is positive while Project B's NPV is negative
B)Project A; because it has the higher required rate of return
C)Project B; because it has the largest total cash inflow
D)Project B; because it has a negative NPV which indicates acceptance
E)Neither project; because neither has an NPV equal to or greater than its initial cost

Question

Quizplus · Accepted Answer

We can calculate the net present value (NPV) of each project using the given data and their respective required rates of return:
NPV(A) = -$54,500 + $16,400/(1+0.139) + $28,900/(1+0.139)^2 + $31,700/(1+0.139)^3 = $2,021.60
NPV(B) = -$69,400 + $0/(1+0.125) + $48,300/(1+0.125)^2 + $42,100/(1+0.125)^3 = -$583.96
Since Project A has a positive NPV while Project B has a negative NPV, we should choose Project A. Therefore, the correct answer is A)Project A; because its NPV is positive while Project B's NPV is negative.

Wilson's Market Is Considering Two Mutually Exclusive Projects That Will