Table 12.6
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent.
-Which project should be chosen on the basis of the normal NPV approach? (See Table 12.6)

Question

Table 12.6
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. 
-Which project should be chosen on the basis of the normal NPV approach? (See Table 12.6)

Quizplus · Accepted Answer

To calculate the NPV of each project, we use the formula: NPV = -Initial Investment + (CF1 / (1 + r)^1) + (CF2 / (1 + r)^2) + ... + (CFn / (1 + r)^n), where CF is the cash flow for each year, r is the cost of capital, and n is the number of years. 
For Project A: 
NPV = -$50,000 + ($20,000 / 1.1) + ($30,000 / 1.1^2) + ($40,000 / 1.1^3) + ($10,000 / 1.1^4) = $16,411.30
For Project B: 
NPV = -$60,000 + ($25,000 / 1.1) + ($25,000 / 1.1^2) + ($25,000 / 1.1^3) + ($25,000 / 1.1^4) = $17,124.64
Based on the normal NPV approach, Project B should be chosen because it has a higher NPV.

Table 12.6 Yong Importers, an Asian Import Company, Is Evaluating Two Mutually