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Homework answers / question archive / A company is considering investing in two independent projects

A company is considering investing in two independent projects

Finance

A company is considering investing in two independent projects. The useful life of both projects is one year only and they are not divisible. Project X has an initial investment cost of $2 and expected cash flow of $2.5 million. Project Y has an initial investment cost of $4 million and expected cash flow of $4.8. The investment budget is $5 million. If the discount rate is 10%, which project(s) should the company undertake?

Select one:

a. Project A

b. Both projects

c. None of these projects

d. Project B

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Net present value = Present value of future cash flow - Initial investment

Project A

Present value of future cash flow = Future value / (1+ Present value)^Number of periods

= 2.5/(1+10%)^1

= 2.27

Net Present value = 2,27 - 2

= 0.27 Millions

Project B

Present value of future cash flow = Future value / (1+ Present value)^Number of periods

= 4.8/(1+10%)^1

= 4.36

Net Present value = 4.36 - 4

= 0.36 Millions

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