Real Time Systems Inc. is considering the development of one of two mutually exclusive new computer models. Each will require a net investment of $5,000.
The cash flow figures for each project are shown below:
Period Project A Project B
1 $2,000 $3,000
2 2,500 2,600
3 2,250 2,900
Model B, which will use a new type of laser disk drive, is considered a high-risk project, while Model A is of average risk. Real Time adds 2 percentage points to arrive at a risk-adjusted cost of capital when evaluating a high-risk project.
The cost of capital used for average risk projects is 12 percent. What are their NPV's?