Two mutually exclusive projects have an initial cost of $60,000 each. Project A produces cash inflows of $30,000, $27,000, and $20,000 for Years 1 through 3, respectively. Project B produces cash inflows of $80,000 in Year 2 only. The required rate of return is 10 percent for Project A and 11 percent for Project B. Which project(s) should be accepted and why

Project B

Explanation:

The computation of the net present value is shown below:

For project A

              (in dollars)                                              (in dollars)

YearCash flowsDiscount factor at 10%  Present value  

0             -60000                          1                               -60000.00  (A)

1               30000                 0.9090909091                 27272.73

2              27000                 0.826446281                    22314.05

3              20000                 0.7513148009                  15026.30

Total present value                                                       64613.07  (B)

Net present value                                                         4613.07   (B - A)

For project B

              (in dollars)                                              (in dollars)

YearCash flowsDiscount factor at 11%  Present value  

0             -60000                          1                               -60000.00  (A)

1               0                         0.9009009009                   0

2             80000                0.8116224332                     64929.79

3             0                          0.7311913813                        0

Total present value                                                       64929.79 (B)

Net present value                                                         4929.79  (B - A)

As we can see that project B has high net present value as compared with project A so project B should be accepted

a.