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Question
Ace Inc. is evaluating two mutually exclusive projectsProject A and Project B. The initial investment for each project is $50,000. Project A will generate cash inflows equal to $15,625 at the end of each of the next five years; Project B will generate only one cash inflow in the amount of $99,500 at the end of the fifth year (i.e., no cash flows are generated in the first four years). The required rate of return of Ace Inc. is 10 percent. Which project should Ace Inc. purchase?
a. Neither project should be purchased, because neither has a positive net present value (NPV).
b. Project B should be purchased because it has a higher net present value (NPV) than Project A.
c. Project A should be purchased because it will produce cash every year for five years.
d. Project A should be purchased because it has a positive net present value (NPV).
e. Project A should be purchased because Project B does not generate cash flows during the first four years of its life.
Answer
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