There is a firm with two investment projects Project A and B with an initial expenditure of 20,000 USD. Assuming that the projects have two years. Table bellow represents the net revenues. And the discount rate is 10%. Under these circumstances what would be the firm's decision? A B First year Second year 11,500 13,500 9,000 16,000

Net present value i.e. NPV can be calculated to make a decision as to which project should be accepted.

NPV of project A:

Initial expenditure = 20000 USD

discount rate= 10%

Present value of future cash inflows:

= Cash flow 1 x interest rate discount factor for year 1 + cashlfow 2 x interest rate discount factor for year 2

= 11500 x 0.9091 +13500 x 0.8264

= 21611.05 USD

NPV = present value of future cash inflows- initial expenditure

= 21611.05 -20000

= 1611.05 USD

NPV of project B:

Initial expenditure = 20000 USD

discount rate= 10%

Present value of future cash inflows:

= Cash flow 1 x interest rate discount factor for year 1 + cashlfow 2 x interest rate discount factor for year 2

=9000 x 0.9091 +16000 x 0.8264

= 21404.30 USD

NPV = present value of future cash inflows- initial expenditure

= 21404.30-20000

= 1404.30 USD

Net present value of project A i.e. 1611.05 USD is greater than project B i.e. 1404.30 USD. If company needs to select one project then company should accept project A having greater NPV.