Net Present Value

Correct Answer: Project A

The question asks for the selection of the project based on the Net Present Value (NPV). NPV represents the difference between the present value of cash inflows and the present value of cash outflows over a period of time. In simple terms, NPV calculates whether the expected earnings exceed the required investment. Project A and Project B both have a positive NPV, indicating that they are expected to generate returns beyond the initial investment amount. However, Project A has a higher NPV ($60,000) compared to Project B ($55,000). Thus, based on the NPV, Project A is the most beneficial undertaking. Therefore, the answer 'Project B', 'Both projects are equal', and 'None of the projects' are incorrect.

Correct Answer: The lower NPV project may have a quicker payback period

From a financial perspective, a project with a higher Net Present Value (NPV) would generally be preferred. However, the company might choose the lower NPV project if it has a quicker payback period. This could be due to various strategic reasons, such as a need for quicker cash flow returns, risk considerations, or resource allocation constraints. Although 'Lower NPV projects are less risky' and 'Higher NPV projects require more resources' could be possible scenarios, they are not always the case and depend greatly on the specifics of the projects. 'The company made a calculation error' is incorrect as it assumes an error in calculation rather than a strategic decision.

Correct Answer: $1472

To calculate the Net Present Value (NPV) of the project, we need to find the present value (PV) of the future cash flows and then subtract the initial investment. The present value of receiving $18,000 in three years at a discount rate of 3% per annum is calculated as: PV = $18,000 / (1 + 0.03)^3 ≈ $18,000 / 1.092727 ≈ $16,472.54. The NPV is then: NPV = PV - Initial Investment = $16,472.54 - $15,000 ≈ $1,472.54