Table 11.12
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 using the Annualized NPV approach? (See Table 11.12)

Question

Table 11.12
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 using the Annualized NPV approach? (See Table 11.12)

Quizplus · Accepted Answer

Using the annualized NPV approach, we calculate the present value of each project, and then convert each project's net present value to an annualized value over its life. The project with the higher annualized NPV is the better choice.

For Project A, the present value of cash flows is -$22,316.48, and the annualized NPV is $2,890.52.

For Project B, the present value of cash flows is -$22,928.48, and the annualized NPV is -$2,765.05.

Therefore, the better choice is Project A.

Table 11.12 Yong Importers, an Asian Import Company, Is Evaluating Two Mutually