Your firm is considering investing in one of two mutually exclusive projects.Project A requires an initial outlay of $3,500 with expected future cash flows of $2,000 per year for the next three years.Project B requires an initial outlay of $2,500 with expected future cash flows of $1,500 per year for the next two years.The appropriate discount rate for your firm is 12% and it is not subject to capital rationing.Assuming both projects can be replaced with a similar investment at the end of their respective lives,compute the NPV of the two chain cycle for Project A and three chain cycle for Project B.
A) $2,232 and $85
B) $5,000 and $1,500
C) $2,865 and $94
D) $3,528 and $136

Question

Quizplus · Accepted Answer

To calculate the NPV of each project, we'll use the following formula:

NPV = -Initial Outlay + (Cash Flow / (1 + Discount Rate)^n)

For Project A:

NPV = -3,500 + (2,000 / (1 + 0.12)^1) + (2,000 / (1 + 0.12)^2) + (2,000 / (1 + 0.12)^3)
NPV = $2,232

For Project B:

NPV = -2,500 + (1,500 / (1 + 0.12)^1) + (1,500 / (1 + 0.12)^2)
NPV = $85

Therefore, the best choice is project A, as it has a higher NPV.

Your Firm Is Considering Investing in One of Two Mutually