NPV Comparison: Project A vs. Project B

NPV of Project A is higher than Project B

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Question

Consider the following two projects:

Project A -

Initial cash outflow:$1,000,000 -

Cash inflows as follows -

t1: $500,000

t2: $450,000

t3: $250,000

t4: $150,000

t5: $150,000

Project B -

Initial cash outflow: $1,000,000

Cash inflows as follows -

t1: $150,000

t2: $150,000

t3: $250,000

t4: $450,000

t5: $500,000

Assuming a cost of capital of 9%, no taxes, and a $0.00 salvage value for each project at the end of year 5, what is the NPV of each project? Additionally, which of the two projects has the steeper NPV profile?

Answers

A. Project A NPV: $88,596.13, Project B NPV: $110,900.51, Project A has a steeper NPV profile

B. Project A NPV: $114,078.88, Project B NPV: $100,669.59, Project has B has a steeper NPV profile

C. Project A NPV: $234,270.95, Project B NPV: $100,669.59 , Project A has a steeper NPV profile

D. Project A NPV: $234,270.95, Project B NPV: $100,669.59, Project B has a steeper NPV profile

E. Project A NPV: $234,270.95, Project B NPV: $100,669.59, Project A has a steeper NPV profile

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Explanations

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A. B. C. D. E.

Due to the fact that project B has the majority of its cash inflows coming in later periods, it is more sensitive to changes in the cost of capital than is project A, which has the majority of its cash flows coming in earlier periods. This is exemplified by a steeper NPV profile.

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