The following are the cash flows of two independent projects:
YearProject AProject B
0 $ (360) $ (360)
1 190 260
2 190 260
3 190 260
4 190
a. If the opportunity cost of capital is 12%, calculate the NPV for both
projects. (Do not round intermediate calculations. Round your
answers to 2 decimal places.)
b. Which of these projects is worth pursuing?
multiple choice
Project A
Project B
Both Correct
Neither
Explanation
Some values below may show as rounded for display purposes, though unrounded numbers should
be used for actual calculations.
a.
NPVA = −$360 + [$190 × Annuity factor (12%, 4 periods)]
=−$360 +$190 ×[ − ]=$217.1010.12 10.12× (1.12)4=−$360 +$190 ×[10.12 −10.12 ×
(1.12)4]=$217.10
NPVB = −$360 + [$260 × Annuity factor (12%, 3 periods)]
= −$360 +$260 ×[ − ] = $264.4810.12 10.12× (1.12)3= −$360 +$260 ×[10.12 −10.12 ×
(1.12)3] = $264.48
b.
Both projects are worth pursing as they are independent projects with positive NPV values.
Calculator computations:
a.
CF0 = −360
CO1 = 190, FO1 = 4
I = 12
