J & H Corp. is evaluating two mutually exclusive projects. Their cost of capital is 15 percent. Costs and cash flows are given in the following table. Which project should be accepted? You only have to make the comparison using NPV, don’t bother with IRR. Year Project A Project B 0 $(1,250,000) $(1,250,000) 1 $250,000 $350,000 2 $350,000 $350,000 3 $450,000 $350,000 4 $500,000 $350,000 5 $750,000 $350,000 Solution (All values in thousand dollars) npv of project A = -1250 +250/1.15 +350/(1.15)^2 +450/(1.15)^3 +500/(1.15)^4 +750/(1.15)^5 = - 1250+250*.8696+350*.7561+450*.6575+500*.5718+750*.4972 = - 1250+217.4+264.6+295.9+285.9+372.9 = 186.7 thousand dollars npv of project B = -1250 +350*.8696+350*.7561+350*.6575+350*.5718+350*.4972 = - 1250+304.4+264.6+230.3+200.3+174.0 = -76.4 thousand dollars npv of project B is negative and hence not acceptable. npv of project A is positive, and hence acceptable. (ANSWER).

1. J & H Corp. is evaluating two mutually exclusive projects. Their cost of capital is 15 percent.
Costs and cash flows are given in the following table. Which project should be accepted? You
only have to make the comparison using NPV, don’t bother with IRR.
Year Project A Project B
0 $(1,250,000) $(1,250,000)
1 $250,000 $350,000
2 $350,000 $350,000
3 $450,000 $350,000
4 $500,000 $350,000
5 $750,000 $350,000
Solution
(All values in thousand dollars) npv of project A = -1250 +250/1.15 +350/(1.15)^2
+450/(1.15)^3 +500/(1.15)^4 +750/(1.15)^5 = -
1250+250*.8696+350*.7561+450*.6575+500*.5718+750*.4972 = -
1250+217.4+264.6+295.9+285.9+372.9 = 186.7 thousand dollars npv of project B = -1250
+350*.8696+350*.7561+350*.6575+350*.5718+350*.4972 = -
1250+304.4+264.6+230.3+200.3+174.0 = -76.4 thousand dollars npv of project B is negative
and hence not acceptable. npv of project A is positive, and hence acceptable. (ANSWER)