26 Jun Question: We Have Two Independent And Mutuall
We have two independent and mutually exclusive projects, A and B. Project A requires an initial investment of $1000, and will yield $500 of cash inflows for the next three years. Project B requires an initial investment of $3,500, and will yield $1,000 of cash inflows for the next five years. The required return on both projects is 10%
What is the real rate of return based on the exact Fisher equation?
1 + R = (1+r)x (1+h)
1+ .10 = (1+r) x (1+0.03)
r = 1.10 / 1.03 -1
Real Rate of Return = 6.796% = 6.8%
A. What are the real cash flows from Project A and Project B?
B. What are the real net present values of Project A and Project B? (Hint: The real NPV should be the same as the nominal NPV.)
C. Which project should be chosen based on the real cash flows and real rate of return?
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