Chapter 2, Problem 4

You work for the 3T company, which expects to earn at least 18 percent on its investments. You have to choose between two similar projects. Your analysts predict that inflation rate will be a stable 3 percent over the next 7 years. Below is the cash flow information for each project. Which of the two projects would you fund if the decision is based only on financial information? Why?

1. At 18% Rate of Return for the first problem, the 3T company could choose to fund either project because (Project 1) shows a positive NPV of $119,689 and (Project 2) shows a positive NPV of $176,525. If they want to choose the project with the highest NPV to fund, then they should choose (Project 2) with the NPV of $176,525

2. At the 21% Rate of Return (adding 3% inflation) for the second problem, the 3T company could also choose to fund either project because (Project 1) shows a positive NPV of $76,650 and (Project 2) shows a positive NPV of $129,536. If they want to choose the project with the highest NPV to fund, then they should choose (Project 2) with the highest NPV of $129,536.