Problem:
Bennet Inc. uses the net present value method to evaluate capital projects. Bennet's required rate of return is 10%. Bennet is considering two mutually exclusive projects for its manufacturing business. Both projects require an initial outlay of $120,000 and are expected to have a useful life of four years. The projected after-tax cash flows associated with these projects are as follows:
|
Year
|
Project X
|
Project Y
|
|
1
|
$40,000
|
$10,000
|
|
2
|
40,000
|
20,000
|
|
3
|
40,000
|
60,000
|
|
4
|
40,000
|
80,000
|
|
Total
|
$160,000
|
$170,000
|
Assuming adequate funds are available, which of the following project options would you recommend that Bennet's management undertake?
1.Project X only.
2.Project Y only.
3.Projects X and Y.
4.Neither project.