Table 11.11
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 11.11)

Question

Table 11.11
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 11.11)

Quizplus · Accepted Answer

Using the normal NPV approach, we calculate the NPV of project A and B as:
NPV_A = -$20,000 + ($5,000/1.1) + ($6,000/1.1^2) + ($7,000/1.1^3) + ($8,000/1.1^4) = $1,812.53
NPV_B = -$30,000 + ($10,000/1.1) + ($15,000/1.1^2) + ($20,000/1.1^3) = $3,360.98
Therefore, project B should be chosen because it has a higher NPV.

Table 11.11 Yong Importers,an Asian Import Company,is Evaluating Two Mutually Exclusive Projects,A