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FinanceQ&A LibraryConsider the following cash flows on two mutually exclusive projects: YearProject AProject B0 –$56,000 –$71,000 1 36,000 35,000 2 31,000 44,000 3 26,000 47,000 The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 3 percent. Calculate the NPV for each project. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV FOR PROJECT A:NPV FOR PROJECT B:Question

Asked Nov 11, 2019

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Consider the following cash flows on two mutually exclusive projects: |

Year | Project A | Project B | ||

0 | –$ | 56,000 | –$ | 71,000 |

1 | 36,000 | 35,000 | ||

2 | 31,000 | 44,000 | ||

3 | 26,000 | 47,000 | ||

The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 3 percent. |

Calculate the NPV for each project. |

NPV FOR PROJECT A:

NPV FOR PROJECT B:

Step 1

Cash flows given for project A are in real terms, so real discount rate should be used to calculate their present value. This can be done by considering inflation in the calculation.

The net present value for project A can be calculated with the help of below expression:

Step 2

The net present value for project A is calculated below:

Step 3

Cash flows given for project B are in nominal terms, so given nominal discount rate should be used to calculate their...

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