Choosing between two mutually exclusive projects
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Mutual exclusive investment
Here are the cash flow forecast for two mutually exclusive projects:
Cash Flows, Dollars
Year Project A Project B
0 -$100 -$100
1 30 49
2 50 49
3 70 49
Which project would you choose if the opportunity cost of capital is 2 percent?
Which would you choose if the opportunity cost of capital is 12 percent?
Why does you answer change?
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This solution helps with a problem regarding choosing between two mutually exclusive projects. The answer are provided in Excel.
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NPV is defined as the difference between an investment's market value and its cost. It is only a good investment if it makes money for the company so a positive NPV will be needed. This quantitative ranking method is the best to use due to its consideration of the time value of money and its more accurate breakdown of value. Thus project having higher NPV will be ...
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