Bennet Inc. uses the net present value method to evaluate capital projects. Bennet’s required rate of return is 10%. Bennet is considering two mutually exclusive projects for its manufacturing business. Both projects require an initial outlay of $120,000 and are expected to have a useful life of four years. The projected after-tax cash flows associated with these projects are as follows:
|
Year |
Project X |
Project Y |
|
1 |
$40,000 |
$10,000 |
|
2 |
40,000 |
20,000 |
|
3 |
40,000 |
60,000 |
|
4 |
40,000 |
80,000 |
|
Total |
$160,000 |
$170,000 |
Assuming adequate funds are available, which of the following project options would you recommend that Bennet’s management undertake?
- Project X only.
- Project Y only.
- Projects X and Y.
- Neither project.