You are trying to decide among two mutually exclusive projects: a safe project (S); and a risky project (R). Both projects require an initial investment of $1,000.

Project S allows you to produce and sell a good that costs $25 per unit to produce (all variable costs) and that will sell for $40. Demand is 200 units.

Project R allows you to produce and sell a good that costs $25 per unit to produce (all variable cost) and that will sell for either $70 or $12. Demand is 200 units. The price will be high or low with equal probability and you won't know the price until after you invest the initial $1,000, but before you commit to production and incur any additional costs.

Project S has a cost of capital of 20%. Project R has a cost of capital of 50%. Cash flows from production and sales occur one year after the initial investment.

Q.What is the NPV of project S?

Q.What is the NPV of project R?

Answer rating: 100% (QA)

To calculate the Net Present Value NPV of Project S and Project R well follow these steps 1 Calculat... View the full answer