Adage Mining Inc. uses a cost of capital of 12 percent to evaluate average risk project and it adds or subtracts 2 percent to adjust for risk. Currently the firm has two mutually exclusive projects under consideration. Both the projects have an initial cost of $200,000 and will last four years.
Project A, risker than average, will produce an annual cash flow of $71,104 at the end of each year.
Project B, of less than average risk will produce cash flows of $146,410 at the end of Year 3 and 4 only.
Which investment should firm chose and Why?