A firm is considering two mutually exclusive projects with the following cash flows: Each project requires an investment of $100,000.The cost of capital is 10 percent.
Which project will have the higher net present value?

Question

A firm is considering two mutually exclusive projects with the following cash flows:  Each project requires an investment of $100,000.The cost of capital is 10 percent.
Which project will have the higher net present value?

Quizplus · Accepted Answer

Calculating the net present value of each project:
NPV(X) = -100,000 + 30,000/(1+0.1) + 60,000/(1+0.1)² + 90,000/(1+0.1)³ = $105,020.13
NPV(Y) = -100,000 + 45,000/(1+0.1) + 55,000/(1+0.1)² + 75,000/(1+0.1)³ = $105,144.59

Therefore, Project Y has a higher net present value and should be chosen over Project X.

A Firm Is Considering Two Mutually Exclusive Projects with the Following