A Firm Is Considering Two Alternative Projects

Essay

A firm is considering two alternative projects. Project A requires an initial expenditure of $100,000 plus an expenditure of $10,000 at the end of each the next five years. It will yield $98,000 in revenue at the end of the first year and at the end of the fifth year. Project B requires an initial expenditure of $50,000. It will yield $15,000 in net revenue at the end of each of the next five years. Both projects have a life of five years with no salvage value or disposal cost. The table below provides present value factors for the firm's discount rate of 12%. Calculate the net present value and profitability index of each project. Which project is preferred by each criterion?