Two mutually exclusive projects have an initial cost of $47,500 each. project a produces cash inflows of $25,300, $37,100, and $22,000 for years 1 through 3, respectively. project b produces cash inflows of $43,600, $19,800 and $10,400 for years 1 through 3, respectively. the required rate of return is 14.7 percent for project a and 14.9 percent for project b. which project(s) should be accepted and why

The project that should be accepted is Project A, because it has the larger Net Present Value.

Explanation:

Net Present Value (NPV) – Project A

Year    Cash Flow    Present Value factor     Present Value of Cash Flow

1            25,300.00          0.871840                                 22,057.54

2            37,100.00            0.760104                                28,199.87

3            22,000.00           0.662689                                 14,579.16  

TOTAL                                                                              $64,836.57

Net Present Value of the Project = Total Present value of cash inflows – Initial Investment

                                                        = $64,836.57 – 47,500

                                                       = $17,336.57

Net Present Value (NPV) – Project B

Year      Cash Flow     Present Value factor     Present Value of Cash Flow

1            43,600.00             0.870322                          37,946.04

2          19,800.00             0.757460                           14,997.72

3           10,400.00            0.659234                           6,856.04

TOTAL                                                                        $ 59,799.79

Net Present Value of the Project = Total Present value of cash inflows – Initial Investment      

                                                       = $59,799.79 – 47,500

                                                       = $12,299.79

Therefore, The project that should be accepted is Project A, because it has the larger Net Present Value.

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