Use the information for the question(s)below.

-If WiseGuy Ltd is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 8%, which should the company choose?

A)Project A
B)Project B
C)Neither project-both have negative NPV.
D)Both projects-both have positive NPV.

Question

Use the information for the question(s)below.
 
-If WiseGuy Ltd is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 8%, which should the company choose?

A)Project A 
B)Project B 
C)Neither project-both have negative NPV. 
D)Both projects-both have positive NPV.

Quizplus · Accepted Answer

Calculating the NPVs using a discount rate of 8%:
Project A: 
NPV = -$10,000 + $2,000/(1+0.08) + $2,000/(1+0.08)^2 + $2,000/(1+0.08)^3 + $2,000/(1+0.08)^4 + $2,000/(1+0.08)^5 
= -$10,000 + $1,853.93 + $1,716.41 + $1,587.25 + $1,466.07 + $1,352.53 
= $976.19

Project B: 
NPV = -$15,000 + $3,200/(1+0.08) + $3,200/(1+0.08)^2 + $3,200/(1+0.08)^3 + $3,200/(1+0.08)^4 
= -$15,000 + $2,957.97 + $2,721.75 + $2,496.08 + $2,280.73 
= $1,456.53

Since the NPV of Project B is positive while the NPV of Project A is only slightly above zero, WiseGuy Ltd should choose Project B.

Use the Information for the Question(s)below