A company must choose between two mutually exclusive projects: Alpha and Bravo,to enhance its current operations.Project Alpha requires a $12,000 cash outlay today and is expected to generate after-tax cash flows of $6,000 in year 1,$6,500 in year 2,and $7,000 in year 3.Project Bravo requires a $20,000 cash outlay today and is expected to generate after-tax cash flows of $7,000 in year 1,$8,000 in year 2,$9,000 in year 3 and $8,000 in year 4.The appropriate discount rate is 10 percent.Which project should the firm choose? Assume both projects can be replicated.

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Quizplus · Accepted Answer

Project Alpha's NPV 11ea8229_3482_0ed9_bbd8_f1505f26f0f4_TB1726_00 Project Alpha's total NPV over a 12-year time horizon
= $4,085.65 + $4,085.65*PVIF(10%,3)+ $4,085.65*PVIF(10%,6)+ $4,085.65*PVIF(10%,9)
= $11,194
Project Bravo's NPV 11ea8229_3482_0eda_bbd8_1d0d75b4db3d_TB1726_00 Project Bravo's total NPV over a 12-year time horizon
= $5,201.15 + $5,201.15*PVIF(10%,4)+ $5,201.15*PVIF(10%,8)= $11,180

A Company Must Choose Between Two Mutually Exclusive Projects: Alpha