Good old XYZ Corp. is considering two mutually exclusive projects, A & B in order to expand their product line. The cost accountants determined the following: A’s initial investment must be $42,400, while project B will cost $60,000.

Project A has projected cash flows of $23,000 a year, and project B of $24,000 a year. The project should last 3 years.  

In addition, the following rates has been given: the prime = 7%; Labor = 6%; the firm’s cost of capital = 12%; and the risk-free rate = 3%

Directions:

Using the NPV analysis method, compute the NPV for project A and B and determine which project would you rather accept. (show all your computation).