Virus Stopper Inc., a supplier of computer safeguard systems, uses a cost of capital of 12 percent to evaluate average-risk projects, and it adds or subtracts 2 percentage points to evaluate projects of more or less risk. Currently, two mutually exclusive projects are under consideration. Both have a cost of $200,000 and will last 4 years. Project A, a riskier-than-average project, will produce annual end-of-year cash flows of $71,104. Project B, a less-than-average-risk project, will produce cash flows of $146,411 at the end of years 3 and 4 only. Virus stopper should accept
a. B with a NPV of $10,001
b. Both A and B because both have NPVs greater than zero
c. B with a NPV of $8,042
d. A with a NPV of $7,177
e. A with a NPV of $15,968
choose (a) B with a NPV of $10,001.
Calculate required returns on A and B:
Project A High risk kRisk adjusted = 12% + 2% = 14%.
Project B Low risk kRisk adjusted = 12% - 2% = 10%.
NPVA = $71,104(PVIFA"%,") - $200,000