Question
You are considering between two projects both costing $6,000. The first one runs for 3 years and produces $10,000 in revenues (given in nominal terms),
You are considering between two projects both costing $6,000. The first one runs for 3 years and produces $10,000 in revenues (given in nominal terms), and costs $5,000 (given in nominal terms) to run. Revenues of this project are fixed in real terms while costs are fixed in nominal terms. The second one runs for 4 years and produces $7,500 in revenues (given in nominal terms), and costs $3,500 (given in nominal terms) to run. Revenues of this project are fixed in real terms for the first 3 years and they are fixed in nominal terms for the last year, i.e. between years 3 and 4. Costs of the second project are fixed in nominal terms. Book values of both projects of both projects are recorded in nominal terms and depreciate on a straight line to zero. The resale value of each project at the end of its lifespan is equal to zero, i.e. they cannot be sold. The nominal APR is 14% and the inflation is 4%. Corporate tax rate is 34%. Which project would you choose?
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