Letterman Hospital expects Projects A and B to generate the following cash flows:

a. Determine the net present value for both projects using a cost of capital of 15 percent.

b. Determine the net present value for both projects using a cost of capital of 5 percent.

c. At a 5 percent discount rate, which project should be accepted? At a 15 percent discount rate, which project should be accepted? Explain.

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Project A Year Initial investment Net operating cash flows Project B 0 1 2 3 4 5 ($500) $900 $800 $300 $200 $100 Year 0 1 2 3 4 5 Initial ($500) investment Net operating $100 $200 $300 $800 $900 cash flows