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Accepting a Mutually Exclusive Project

7. You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 8.5 percent? What if the discount rate is 13 percent?

Year Project A Project B

0 -$80,000 $80,000

1 32,000 0

2 32,000 0

3 32,000 105,000

A) accept project A as it always has the higher NPV

B) accept project B as it always has the higher NPV

C) accept A at 8.5 percent and B at 13 percent

D) accept B at 8.5 percent and neither at 13 percent.

Solution Preview

At 8.5% discount rate:
Project A

Year Cash Flow Discount factor Discounted cash flow
0 $(80,000) 1.000 $(80,000.00)
1 $32,000 0.922 $29,493.09
2 $32,000 0.849 $27,182.57
3 $32,000 0.783 $25,053.06

Discount Rate 8.50% NPV $1,728.72 ...

Solution Summary

The solution discusses which project should be accepted out of two mutually exclusive projects.

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