3.

Suppose a company must choose between two projects (A and B) with the following

characteristics:

P

roject A

Project B

Cost of

equipment (investment)

$

6

00

0

Working capital (investment)

0

$

6

25

Cash flow (year 2)

$255

$240

Cash flow (year 3)

$255

$240

Cash flow (year 4)

$265

$240

Cash flow (year 5)

$265

$240

Assume an effective rate of

8

% per year.

Calculate the NPV for each alternative.

Which project

should the company choose and

why?