You are considering two projects.Project A has projected cash flows of $6,500,$4,500,and $2,500 for the next three years,respectively.Project B has projected cash flows of $2,500,$4,500,and $6,500 for the next three years,respectively.Assuming both projects have the same initial cost,you know that:
A)there are no conditions under which the projects can have equal values.
B)Project B has a higher net present value than Project A.
C)Project A is more valuable than Project B given a positive discount rate.
D)both projects offer the same rate of return.
E)both projects have equal net present values at any discount rate.

Question

Quizplus · Accepted Answer

We can compare the projects' net present values (NPVs) to determine which project is more valuable given a positive discount rate. Assuming a discount rate of 10%:
- Project A's NPV = $6,500/(1.1)^1 + $4,500/(1.1)^2 + $2,500/(1.1)^3 = $10,876.17
- Project B's NPV = $2,500/(1.1)^1 + $4,500/(1.1)^2 + $6,500/(1.1)^3 = $9,882.52
Therefore, Project A has a higher NPV and is more valuable than Project B. Option A is incorrect because the projects could have equal values if the discount rate is 0%. Option B is incorrect because Project A has a higher NPV. Option D is incorrect because the rate of return would depend on the initial cost, which is not given. Option E is incorrect because the NPVs are not equal at any discount rate.

You Are Considering Two Projects