Problem:

Tri-City Industries is considering two possible capital projects. Project A requires an initial investment of $240,000 and provides cash flows before tax of $120,000 in year one, $140,000 in year two, and $160,000 in year three. If project A is accepted, project B may be undertaken. It provides cash flows before tax of $140,000 for each of three years. However, projects A and B are partial substitutes, and the cash flows of project A will decrease by $40,000 in each of the three years if project B is also undertaken. The company's weighted average cost of capital is 13% and its tax rate is 35%. Ignore the impact of depreciation for this question.

a. What is the NPV of doing only project A?

b. What is the maximum amount that project B can cost so that the combination of taking

both projects provides the same benefit of investing only in project A?

Additional Information:

The question is from Finance and it is about the calculation of NPV for two projects A and B. Detailed calculations and explanation have been given in the solution.