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Which project should be accepted?

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Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:

The required rate of return on these projects is 11 percent.

YEAR PROJECT A PROJECT B
0 -\$100,000 -\$100,000
1 32,000 0
2 32,000 0
3 32,000 0
4 32,000 0
5 32,000 \$200,000

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Summary: Project A provides a steady cash flow which affects the interest in a positive manner making the annual interest amount larger than that of Project B (assuming a simple interest of 11% paid at the end of the year on the available balance) until the end of year 5.

At the end of the first year Project A has a total of \$146520 while Project B has a balance of \$111000. At ...

Solution Summary

Which project should be accepted is determined.

\$2.49