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A company is considering investing in two independent projects
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
Expert Solution
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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