Your company is considering two mutually exclusive projects. Project A has an initial cost of $80,000 and generates expected cash flows of $25,000 per year for six years. Project B has an initial cost of $80,000 and generates expected cash flows of $60,000 per year for two years. The firm's cost of capital is 12.00%. Determine which project you would choose.

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Question:

Your company is considering two mutually exclusive projects. Project A has an initial cost of $80,000 and generates expected cash flows of $25,000 per year for six years. Project B has an initial cost of $80,000 and generates expected cash flows of $60,000 per year for two years. The firm's cost of capital is 12.00%. Determine which project you would choose.

Answers

Answer:The company should accept Project B because it generates more value per year as compared to Project A.Explanation:Explanation can be seen in the file attached.

Answer:Choose Project AExplanation:To choose between two mutually exclusive projects we will use two approaches NPV approach .Under NPV accept project if NPV is positive and has higher NPV.Project A NPV -80 000 + 25000/1.12+25000/1.12^2+25000/1.12^3+25000/1.12^4+25000/1.12^5+25000/1.12^6 = -80000+22321.43+19929.85+17794.51+15887.95+14185.67+12665.78           =$22,785.19Project B NPV - 80 000 + 60000/1.12 ^1+60000/1.12^2 = $21,403.06Choose A as it has higher NPV.

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