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 three 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 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 chosen.

Question

Quizplus · Accepted Answer

To compare the two projects, we need to calculate the present value of their cash flows using the discount rate of 10%.

For Project H: 
PV = $45,000 / (1 + 0.10)^1 + $45,000 / (1 + 0.10)^2 + $45,000 / (1 + 0.10)^3 + $100,000 
PV = $111,359.10

For Project T: 
PV = $30,000 / (1 + 0.10)^1 + $40,000 / (1 + 0.10)^2 + $70,000 / (1 + 0.10)^3 + $100,000 
PV = $121,534.54

Therefore, Project T has a higher present value of cash flows, so it should be chosen over Project H.

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