Exercise 3-2 Net present value method I It is your task to assess two mutually exclusive investment projects:

Alternative A Alternative B Initial outlay 10,000 15,000 Economic life Discount rate in %

Annual cash outflow 1,000 800 Annual cash inflow 3,100 3,900

a) Which alternative would you select for acceptance under the conditions of the net present value method? Explain why.

b) Calculate the net present value for each project, and formulate your investment decision advice. All payments with the exception of the initial outlay are assumed to occur on the last day of the year.