Analyze the cash flows for two proposed projects, Project A and Project B. Each project has a cost of $10,000, and the desired rate of return for each project is 12%. Expected cash flows are:
Project A: Year 0 ($10,000) year 1 $6,500, year 2 $3,000, year 3 $3,000, year 4 $1,000
Project B: Year 0 ($10,000) year 1 $3,500, year 2 $3,500, year 3 $3,500, year 4 $3,500
The IRR for Project A is 18% while for Project B is 15%.
1. Calculate each project's NPV.
2. Identify the project that is the best option, if only one project can be selected. Give reasons for your choice.