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 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 choose, we need to calculate the net present value (NPV) of each project using the given discount rate of 10%.

The NPV of Project H can be calculated as follows:

NPV = (-$100,000) + ($45,000 / 1.10) + ($45,000 / 1.10^2) + ($45,000 / 1.10^3) 
    = -$100,000 + $38,636 + $33,215 + $28,793 
    = $0

The NPV of Project T can be calculated as follows:

NPV = (-$100,000) + ($30,000 / 1.10) + ($40,000 / 1.10^2) + ($70,000 / 1.10^3) 
    = -$100,000 + $27,273 + $32,231 + $50,319 
    = $9,823

Since both projects have positive NPVs, both projects should be accepted. However, if we had to choose between the two projects, Project T has the higher NPV, making it the better choice.

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