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You have been given the following information on two mutually exclusive projects; use this information to calculate the present value of the costs and the
You have been given the following information on two mutually exclusive projects; use this information to calculate the present value of the costs and the benefits. Each project has a life of two years plus initial costs. Use a discount rate of 10% (0.1). Project A has an initial cost of $1,000 (hint initial costs are not discounted), and returns of $2,000 in year 1 and $3,000 in year 2. Project B will use land bought two years ago for $5,000. The project will have returns of $3,000 in year 1 and $4,000 in year two. The current market price of the land is $2,000. Project B will also provide benefits to two employees who will be transfer from another job. The employees' benefits will be the same as their current job and total $10,000 per employee. Hint: see tenets of cost - benefit analysis. a) Calculate the present value of costs and benefits for project A and project B for the initial period and the two time periods. Do these calculations separately. b) What are the benefit / cost (B/C) ratios for projects A and B? Using the B/C ratios, which project do you undertake? Why? c) What are the net present value (NPV) for projects A and B? Using NPV, which project do you undertake? Why? d) Are the answers to (b) and (c) the same? Why or why not? e) If the projects were not mutually exclusive, which project(s) would you undertake? Why
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