Assume Project A has a present value of net cash inflows of $79,600 and an initial investment of $60,000

Finance Aug 12, 2020

Assume Project A has a present value of net cash inflows of $79,600 and an initial investment of $60,000. Project B has a present value of net cash inflows of $82,500 and an initial investment of $75,000. Assuming the projects are mutually exclusive, which project should management select? Justify your answer through work out.

Expert Solution

Computation of Net Present Value:

Net Present Value = - Initial Investment + Net Present Value of Cash Inflows

For Project A:

Net Present Value = -$60,000 + $79,600 = $19,600

For Project A:

Net Present Value = -$75,000 + $82,500 = $7,500

Project A should be accepted as Net Present Value is higher for Project A.

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