Here are the cash-flow forecasts for two mutually exclusive projects:

Here are the cash-flow forecasts for two mutually exclusive projects:

	Cash Flows (dollars)
Year	Project A				Project B
0	−	105			−	105
1		35				54
2		55				54
3		75				54

a-1. What is the NPV of each project if the opportunity cost of capital is 3%?

Explanation
Some values below may show as rounded for display purposes, though unrounded numbers should be used for actual calculations.

a.

NPVA = −$105 +	$35	+	$55	+	$75	= $49.46
	1.03		(1.03)2		(1.03)3

NPV_B = −$105 + [$54 × Annuity factor (3%, 3 periods)]

                                  = −$105 +  $54  ×  [1.03 − 1.03 ×  (1.03)3] =  $47.75


If r = 3%, choose A.

b.

NPVA = −$105 +	$35	+	$55	+	$75	= $16.34
	1.15		(1.15)2		(1.15)3

NPV_B = −$105 + [$54 × Annuity factor (15%, 3 periods)]

                                  = −$105 +  $54  ×  [1.15 − 1.15 ×  (1.15)3] =  $18.29


If r = 15%, choose B.
Thank you!