You are considering two independent projects that have differing requirements.

Project A has a required return of 12 percent compared to Project B's required return of 13.5 percent. Project A costs $75,000 and has cash flows of $21,000, $49,000, and $12,000 for Years 1 to 3, respectively.

Project B has an initial cost of $70,000 and cash flows of $15,000, $18,000, and $41,000 for Years 1 to 3, respectively.

Which of the two should you accept/reject? Explain.

I will accept Project "B."

Explanation:

Though, Project B has a higher required Return on Investment ROI which is 13.5% but has a progressive increasing cash flow of Project B has an initial cost of $70,000 and cash flows of $15,000, $18,000, and $41,000 for Years 1 to 3, respectively.

Analysis of the Cash Flow:

$18,000.00 - $15,000.00 = $3,000.00

$41,000.00 - $18000.00 = $23,000.00.

∴ with Initial Outlay of $70,000.00

$3,000.00 + $23,000.00 = $26,000.00

while

Project A has a retrogressive trend of cash flow of $21,000.00

∴$49,000.00 - $21,000.00 = $28,000.00

$28,000.00 - $12,000.00 = $16,000.00

Therefore comparing the two figures from Project A & B respectively:

Project A = $16,000.00

Project B = $26,000.00

It shows a deficit of $10,000.00 for Project B & surplus of $10,000.00 for Project A in the 3 years of required ROI.