Question
ACI is considering investing $10,000 in either of two projectsA or B. Project A have a project life of 5 years and project B have
ACI is considering investing $10,000 in either of two projectsA or B. Project A have a project life of 5 years and project B have a project life of 6 years. At the end of year 5, ACI estimates that project A can be sold to net $1,200 and at the end of year six project B can be sold to net $1,500. For project A, the cash flows over the five-year life of the project will be $2,000 in the first two years, $4,000 in the next two, and $5,000 in the last year. For project B, the cash flows over the six-year life of the project will be $2,500 in the first two years, $3,500 in the next two, and $4,000 in the last two years. ACI feels that although project A has average risk, project B is considerably riskier. Therefore, their team decides that ACI should use a discount rate of 11% for project A and 2% additional discount rate for project B. What will be your recommendation for ACI? If they have to select just one project, which particular project should be selected? Show detailed calculation process.
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