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A company has an investment budget of $7 million and is considering two independent projects with a useful life of 2 years
A company has an investment budget of $7 million and is considering two independent projects with a useful life of 2 years. Project A has an initial cost of $2.2 million and present value of expected cash flows of $1.1 million and $1.21 million at the end of years 1 and 2, respectively. Project B has an initial cost of $4.4 million and present value of expected cash flows of $2.2 million and $2.42 million at the end of years 1 and 2, respectively. Which project(s) should the company accept if the discount rate is 10%?
Expert Solution
PROJECT A
NPV = PV of all cash flows - Investment
NPV = (1.1+1.21) - 2.2 = 0.11 million
PROJECT B
NPV = PV of all cash flows - Investment
NPV = (2.2 + 2.42) - 4.4 = 0.22 million
NOW, both projects are independent projects and total investment in 2 project = 2.2 + 4.4 = 6.6 million
Available budget = 7 million
So we can select both the projects as both have positive NPV
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