Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for 6 years. Project 2 will produce cash flows of $48,000 a year for 8 years. The company requires a 15 percent rate of return. Which project should the company select and why?

Question

Quizplus · Accepted Answer

The first step is to calculate the present value of each project's cash flows using the 15 percent rate of return. 
For Project 1, the present value is: 
PV = $52,000(PVIFA15%,6) = $205,795.48 
For Project 2, the present value is: 
PV = $48,000(PVIFA15%,8) = $224,393.81 
Therefore, Project 2 has a higher present value of cash inflows, making it the better choice.