A construction company is considering two projects, A and B, each of which requires an initial investment
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Question:
A construction company is considering two projects, A and B, each of which requires an initial investment of $1 million. The company estimates that the net cash flows for project A will be $200,000 in the first year, $300,000 in the second year, and $400,000 in the third year. For project B, the company estimates that the net cash flows will be $500,000 in the first year, $200,000 in the second year, and $100,000 in the third year. The company has a cost of capital of 8%.
a) Calculate the net present value (NPV) and profitability index (PI) for each project.
b) Determine which project should be selected based on the NPV and PI.
Related Book For
Managerial Accounting
ISBN: 978-0078025518
2nd edition
Authors: Stacey Whitecotton, Robert Libby, Fred Phillips
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