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Project selection

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Your firm has identified three potential investment priorities. The projects and their cash flows are shown here:

Project Cash flow today ($) Cash flow in one year ($)
A -10 20
B 5 5
C 20 -10

Suppose all cash flows are certain and the risk-free interest rate is 10%

1. What is the NPV of each project
2. If the firm can choose only one of these projects, which should it choose?
3. If the firm can choose any two of these projects, which should it choose?

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Solution Summary

The solution explains project selection based on NPV of projects

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1. What is the NPV of each project

NPV of each project = PV of cash flow in year 1 + cash flow today
To calculate the PV of cash flow in year 1 we discount by the risk free rate of 10%
PV = FV/(1+rate)^n = ...

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