Two mutually exclusive investments have the cash flow of Pro

Two mutually exclusive investments have the cash flow of: Project A C-3800 1-3275 I-$250 -$225 I-$200 L-$500 2 4 Project E C-$400I-$250I-200I-$150I-$100-$50 0 2 3 4 5 L= $200 C: Cost, I:Income, L:Salvage The minimum rate of return is 18% for the first two years and 12% for the last three years. Using NPV, explain which investment is economically better? Show all your work in detail please.

Solution

Ans:

Calculation of Net Present Value(NPV) of Project A

Calculation of Net Present Value(NPV) of Project B

Since the Net Present value of Project A is higher, Project A is better

Year	Cash Flow	Discounting Factor(DF)	Present Value
0	-$800	1	-$800
1	$300	0.8475	$254.25
2	$275	0.7182	$197.505
3	$250	0.7118	$177.95
4	$225	0.6355	$142.98
5	$200	0.5674	$113.48
5	$500	0.5674	$283.17
		Net Present Value	$369.86