Solved: Project selected based on the net present value method, Finance Basics

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Project selected based on the net present value method

Problem:

X-treme Vitamin Company is considering two investments, both of which cost $10,000. The cash flows are as follows:

Year Project A Project B

1        $12,000     $10,000
2           8,000         6,000
3           6,000        16,000

Q1. Which of the two projects should be chosen based on the payback method?

Q2. Which of the two projects should be chosen based on the net present value Method? Assume a cost of capital of 12 percent.

Q3. Should a firm normally have more confidence in answer a or answer (2)?

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Finance Basics: Project selected based on the net present value method

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Finance Basics: Project selected based on the net present value method

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