Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project (s) should be accepted and why

The project that should be accepted is Project A, because it has the larger Net Present Value.

Explanation:

Net Present Value (NPV) - Project A

Year Cash Flow Present Value factor Present Value of Cash Flow

1 25,300.00 0.871840 22,057.54

2 37,100.00 0.760104 28,199.87

3 22,000.00 0.662689 14,579.16

TOTAL $64,836.57

Net Present Value of the Project = Total Present value of cash inflows - Initial Investment

= $64,836.57 - 47,500

= $17,336.57

Net Present Value (NPV) - Project B

Year Cash Flow Present Value factor Present Value of Cash Flow

1 43,600.00 0.870322 37,946.04

2 19,800.00 0.757460 14,997.72

3 10,400.00 0.659234 6,856.04

TOTAL $ 59,799.79

Net Present Value of the Project = Total Present value of cash inflows - Initial Investment

= $59,799.79 - 47,500

= $12,299.79

Therefore, The project that should be accepted is Project A, because it has the larger Net Present Value.