Copyright

Two projects, Project A and Project B, are available, each costing $500,000. The discount rate is...

Question:

Two projects, Project A and Project B, are available, each costing $500,000. The discount rate is 10%. Considering the cash flows given below, which project would be more profitable using the net present value (NPV) method?

Year Project A Project B
1 150,000 50,000
2 200,000 150,000
3 250,000 200,000
4 150,000 300,000
5 100,000 200,000

Net Present Value:

The net present value is a tool to determine a project's profitability by comparing the present value of its cash flows with the investment cost. For a project to be accepted, the present value of cash flows should be greater than the investment cost.

Answer and Explanation: 1

Become a Study.com member to unlock this answer!

View this answer

The company should select Project A as it has a higher NPV compared to Project B.

Net present value of Project A:

Year Cash inflows PVAF @ 10%Pres...

See full answer below.


Learn more about this topic:

Loading...
How to Calculate Net Present Value: Definition, Formula & Analysis

from

Chapter 5 / Lesson 20
19K

Learn about what net present value is, how it is calculated both for a lump sum and for a stream of income over multiple years. View some examples on NPV.


Related to this Question

Explore our homework questions and answers library