Corporate Finance Q43
43Consider the following two mutually exclusive projects:
| Project | Year 0 | Year 1 | Year 2 | Year 3 |
| Project A | - 3518 | 2500 | 1450 | 500 |
| Project B | - 3846 | 900 | 1500 | 2500 |
At an annual discount rate of 10% for both projects, the firm should most
likely accept:
likely accept:
- Option : A
- Explanation : Plug in the relevant cash flows into the financial calculator for both the projects and compute the NPVs. Project A: CF0 = -3518, CF1 = 2500, CF2 = 1450, CF3 = 500, I = 10%, CPT NPV NPVA = $328.73 Project B: CF0 = -3846, CF1 = 900, CF2 = 1500, CF3 = 2500, I = 10%, CPT NPV NPVB = $90.14 Since both projects are mutually exclusive i.e. the firm can only accept one, it would choose the one with the higher NPV which is A.
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