Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years. Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1, $40,000 in year 2, and $70,000 in year 3. If the discount rate is 10% and the projects are not mutually exclusive
A) Project H should be chosen.
B) Project T should be chosen.
C) H and T are equally attractive.
D) Both projects should be accepted.

Question

Quizplus · Accepted Answer

To determine which project to accept, we need to calculate the net present value (NPV) of each project, and then compare them to see which one has the higher NPV. The formula for calculating NPV is:

NPV = -initial investment + (cash flow / (1 + discount rate)^year)

Using this formula, we get:

For Project H:
NPV = -100,000 + (45,000 / 1.10) + (45,000 / 1.10^2) + (45,000 / 1.10^3)
NPV = $76,046.21

For Project T:
NPV = -100,000 + (30,000 / 1.10) + (40,000 / 1.10^2) + (70,000 / 1.10^3)
NPV = $70,610.69

Since Project H has a higher NPV than Project T, it appears to be the better option. However, because these projects are not mutually exclusive, we can accept both projects and receive the benefits of both. Therefore, the best choice is to accept both projects (D).

Project H Requires an Initial Investment of $100,000 and the Produces