Question: Consider the following cash flows on two mutually exclusive projects: Year............... Project A............ Project B 0..................... 2$30,000............ 2$45,000 1..................... ... 18,000............ ... 21,000 2..................... ..

Consider the following cash flows on two mutually exclusive projects:

Year............... Project A............ Project B

0..................... 2$30,000............ 2$45,000

1..................... ... 18,000............ ... 21,000

2..................... .. .16,000............ ... 23,000

3..................... .. . 12,000............ ... 25,000

The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 13 percent and the inflation rate is 4 percent. Which project should you choose?

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