Xenex Inc., a supplier of hospital room disinfection systems, has a cost of capital of 12 percent.
To fairly evaluate projects and adjust for risk, it adds or subtracts 2 percentage points to the discount rate.
Currently, two mutually exclusive projects are under consideration. Both have a cost of $200,000 and will last four years.
Neither project is projected to generate positive cash flows and thus both are evaluated on the basis of costs.
However, Project A is judged to be a riskier-than-average project but Project B is determined to a lower than average risk investment.
In which project should Xenex invest its capital?