Giant equipment ltd is considering two projects to invest next years. both project have the same start up costs. project A will produce annual cash flows of $42000 at the beginning of each year for 8 years. project B will produce cash flows of $48000 at the end of each years for 7 years. the company requires a 12%return. a. which project should the company select and why? b. which project should the company select if the interest rate is 14% at the cash flows in project B is also at beginning of the each years.
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Project A is preferred.
Explanation:
Given: Project A will produce annual cash flows of $42000 at the beginning of each year for 8 years. Project B will produce cash flows of $48000 at the end of each years for 7 years.
The company requires 12% return.
It is observed that, project A present value is more because the payments are made at the beginning of the year. Another reason is, in case of project A cash flows are received for 8 years and in case for project B cash flows are only for 7 years.
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