Practice Question
A company is evaluating two projects with the following cash flows:
Project A: Year 1: $50,000; Year 2: $60,000
Project B: Year 1: $70,000; Year 2: $40,000
If the company uses a discount rate of 6%, which project has a higher NPV?
Answer +
Project B
Step-by-step solutions +
Step 1: Calculate NPV for Project A
NPV = $50,000 / (1 + 0.06) + $60,000 / (1 + 0.06)^2
NPV = $47,169.81 + $53,490.97 = $100,660.78
Step 2: Calculate NPV for Project B
NPV = $70,000 / (1 + 0.06) + $40,000 / (1 + 0.06)^2
NPV = $66,037.74 + $35,446.31 = $101,484.05
Step 3: Compare NPVs
Project B has a higher NPV of $101,484.05 compared to Project A’s $100,660.78.
Final Answer: Project B
NPV = $50,000 / (1 + 0.06) + $60,000 / (1 + 0.06)^2
NPV = $47,169.81 + $53,490.97 = $100,660.78
Step 2: Calculate NPV for Project B
NPV = $70,000 / (1 + 0.06) + $40,000 / (1 + 0.06)^2
NPV = $66,037.74 + $35,446.31 = $101,484.05
Step 3: Compare NPVs
Project B has a higher NPV of $101,484.05 compared to Project A’s $100,660.78.
Final Answer: Project B