Project detroit should be pursued as it has the superior npv, Business Management

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b) Based on these figures, Project Detroit should be pursued as it has the superior NPV. Even though both projects yield the same absolute amount of net cash flow (each totalling $550,000), Project Colorado does not observe most of its returns until the final two years, i.e. when the money has lost much of its value. In addition, the payback period for Detroit is shorter (just 2 years). The ARR is the similar for both projects (since DCF are not considered in the calculation of ARR). Other quantitative factors may also necessitate to be considered, e.g. management preferences.

Year

Investment Colorado

Investment Detroit

Net Cash Flow ($)

Discount Factor

Present Value ($)

Net Cash Flow ($)

Discount Factor

Present Value ($)

0

(300,000)

1.00

(300,000)

300,000

1.00

(300,000)

1

50,000

0.9524

47,620

100,000

0.9524

95,240

2

100,000

0.9070

90,700

200,000

0.9070

181,400

3

200,000

0.8638

172,760

200,000

0.8638

172,760

4

200,000

0.8227

164,540

50,000

0.8227

41,135

NPV

 

175,620

 

190,535






 


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