Project A has a required return on 9.2 percent and cash flows of $87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of $85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive?

Multiple Choice

• Accept both projects

• Accept either one, but not both

• Accept Project A and reject Project B

• Reject both projects

• Reject Project A and accept Project B

  Correct

Explanation

NPV_A = $87,000 + $32,600/1.092 + $35,900/1.092² + $43,400/1.092³ NPV_A = $6,288.17 NPV_B = $85,000 + $14,700/1.127 + $21,200/1.127² + $89,800/1.127³ NPV_B = $7,468.93 Since the projects are mutually exclusive, accept the project with the larger positive NPV.