Assume the following information about two individual projects.
Project A -
Initial cash outflow: $175,000 -
Expected cash inflows -
t1: $75,000
t2: $65,000
t3: $35,000
t4: $35,000
t5: $15,000
Project B -
Initial cash outflow: $100,000 -
Expected cash inflows -
t1: $15,000
t2: $15,000
t3: $18,000
t4: $45,000
t5: $45,000
Assuming these projects are not mutually exclusive, and the cost of capital is 10%, which of the two should be undertaken according to NPV? Additionally, which of the two projects has the steeper NPV profile?
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A. B. C. D. E. F.E
The NPV of project B is found to be ($1,766.21), and thus should not be accepted. However, project A has a positive NPV of $6,416.14, and should be accepted.
Project B is characterized as having the majority of its cash inflows occurring in later time periods, and thus is more sensitive to changes in the cost of capital. This is exemplified by a steeper NPV profile for project B.