Question

Which of the two project below would you pursue, if you based the decision on ROI (Discount rate: 10%)? Project 1 had a cash flow as follows: Year 0: -5K, Year 1: 3K, Year 2: 2K, Year 3: 1K Project 2 had a cash flow as follows: Year 0: -7K, Year 1: 5K, Year 2: 3K, Year 3: 2K

Answer 1

Answer:

Project 2 should be accepted as it's net present value (NPV) is higher

Explanation:

Project 1

Year     Cash Flows    Discounting factor @10%   Present Value(in $)

0            (5000)                      1                                (5000)

1             3000                     0.909                            2727                    

2            2000                     0.826                             1652                

3            1000                      0.751                                751

                                                                     NPV     $130          

Year    Cash Flows   Discounting Factor @10%   Present value (in $)

0           (7000)                      1                                  (7000)

1             5000                    0.909                            4545

2            3000                    0.826                             2478

3            2000                    0.751                               1502

                                                                    NPV    $1525  

Note: Cash flows in brackets denote cash outflows or negative cash flows.