Answer:
Neither any of the projects should be accepted
Explanation:
In this question, we have to use the net present value formula which is shown below:
Net present value = Present value of all years cash flows - Initial investment
where,
The Present value of cash inflows is calculated by applying the discount rate which is presented below:
For this, we have to first compute the present value factor which is computed by a formula
= 1 ÷ (1 +rate) ∧ number of year
number of year = 0
number of year = 1
Number of year = 2
So,
Rate = 25%
For year 1 = 0.800 (1 ÷ 1.25) ∧ 1
For year 2 = 0.640 (1 ÷ 1.25) ∧ 2
Now, multiply this present value factor with yearly cash inflows
So
For Project A,
The present value of year 1 = $400 × 0.800 = $320
The present value of year 2 = $400 × 0.640 = $256
and the sum of all year cash inflow is $576
So, the Net present value would be equal to
= $576 - $600 = -24
And,
For Project B,
The present value of year 1 = $500 × 0.800 = $400
The present value of year 2 = $275 × 0.640 = $176
and the sum of all year cash inflow is $576
So, the Net present value would be equal to
= $576 - $600 = -24
Since in both the projects, the NPV is negative.
Hence, neither any of the projects should be accepted
