Microeconomics 2nd Edition by Douglas Bernheim

Exercise 4

Two mutually exclusive projects, A and B, require the same up-front investment in the first year. Project A generates positive net cash flows in years 2 through 5 and nothing after that. Project B generates nothing in years 2 through 5; positive net cash flows in years 6 through 10; and nothing after that. At an interest rate of 10 percent, project A is a better investment than project B. Explain intuitively why project A must be better than project B at higher interest rates as well.