Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years. Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1, $40,000 in year 2, and $70,000 in year 3. If the discount rate is 10% and the projects are mutually exclusive
A) Project H should be chosen.
B) Project T should be chosen.
C) H and T are equally attractive.
D) Both projects should be chosen.

Question

Quizplus · Accepted Answer

To compare the two projects, we need to calculate their net present value (NPV).

For Project H:
NPV = -100,000 + 45,000/(1+0.10)^1 + 45,000/(1+0.10)^2 + 45,000/(1+0.10)^3
NPV = $25,943.88

For Project T:
NPV = -100,000 + 30,000/(1+0.10)^1 + 40,000/(1+0.10)^2 + 70,000/(1+0.10)^3
NPV = $34,905.36

Since Project T has a higher NPV, it should be chosen over Project H. Therefore, the answer is B.

Project H Requires an Initial Investment of $100,000 and the Produces