The following table gives the cash flows for Project A and Project B: Year Project A Project B 0 -3000 -4000 1 1000 1500 2 1000 1800 3 2500 2000 If the discount rate is 15%, which project should we invest in? Project A Project B

The following table gives the cash flows for Project A and Project B: Year Project A Project B 0 -3000 -4000 1 1000 1500 2 1000 1800 3 2500 2000 If the discount rate is 15%, which project should we invest in? Project A Project B

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 4CMA

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

The following table gives the cash flows for Project A and Project B:

Year	Project A	Project B
0	-3000	-4000
1	1000	1500
2	1000	1800
3	2500	2000

If the discount rate is 15%, which project should we invest in?

Project A

Project B

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