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10 June, 11:05

Consider two projects with the following cash flows: Project S is a 4 year project with initial (time 0) cash outflow of 3000 and time 1 through 4 cash inflows of 1500, 1200, 800 and 300 respectively. Project L is a 4 year project with initial (time 0) cash outflow of 3000 and time 1 through 4 cash inflows of 400, 900, 1300, and 1500 respectively. Assuming a 5% cost of capital, determine which project should be chosen if the projects are mutually exclusive.

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  1. 10 June, 15:01
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    Project L has higher NPV than Project S, therefore Project L should be selected

    Explanation:

    Project S:

    Year 0 : (3000)

    Year 1 : 1500 * 0.952 = 1,428

    Year 2 : 1200 * 0.907 = 1,088.4

    Year 3 : 800 * 0.864 = 691.2

    Year 4 : 300 * 0.823 = 246.9

    Total of Cash inflows after discounting: 3,454.5

    Net Present Value : 454.5

    Project L:

    Year 0 : (3000)

    Year 1 : 400 * 0.952 = 380.8

    Year 2 : 900 * 0.907 = 816.3

    Year 3 : 1300 * 0.864 = 1,123.2

    Year 4 : 1500 * 0.823 = 1,234.5

    Total of Cash inflows after discounting: 3,554.8

    Net Present Value : 554.8
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