question archive ABC Company is considering two investments both of which cost $10,000

ABC Company is considering two investments both of which cost $10,000

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ABC Company is considering two investments both of which cost $10,000.

The cash flows are as follows:

Year Project A Project B

1 $6,000 $5,000

2. 4,000 3,000

3. 3,000 8,000

Based on the net present value method, assuming a cost of capital of 10%, which of the two projects should be chosen?

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Answer:

For Project A,
NPV = -10,000 + 6,000 / 1.1 + 4,000 / 1.12 + 3,000 / 1.13 = $1,014.27

For Project B,
NPV = -10,000 + 5,000 / 1.1 + 3,000 / 1.12 + 8,000 / 1.13 = $3,035.31

Based on NPV, Project B will be selected as it has a higher NPV

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