Consider the following projects, X and Y, where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 10 percent?
A) Project X.
B) Project Y.
C) Neither.
D) Not enough information to tell.

Question

Quizplus · Accepted Answer

The firm should choose Project X because its Net Present Value (NPV) is higher. Calculating NPV for both projects at a 10% discount rate:  - Project X: NPV = ($400 / 1.1) + ($400 / 1.1^2) - $600 = $363.64 + $330.58 - $600 = $94.22  - Project Y: NPV = ($500 / 1.1) + ($275 / 1.1^2) - $600 = $454.55 + $226.45 - $600 = $81.00  Since Project X has a higher NPV, it is the better investment.

Consider the Following Projects, X and Y, Where the Firm