Questions: Exam 2 Question 44 of 50 This test 60 point(s) possible This question 1 point(s) possible Project A Project B Time 0 -10,000 -10,000 Time 1 5,000 4,000 Time 2 4,000 3,000 Time 3 3,000 10,000 If WiseGuy inc is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 9%, which should the company choose? A. Project A B. Project B C. Neither project - both have negative NPV. D. Both projects - both have positive NPV.

To determine which project WiseGuy Inc should choose, we need to calculate the Net Present Value (NPV) of each project using the given discount rate of 9%. The NPV is calculated using the formula:

\[ NPV = \sum \frac{C_t}{(1 + r)^t} - C_0 \]

where \(C_t\) is the cash flow at time \(t\), \(r\) is the discount rate, and \(C_0\) is the initial investment.

Calculating NPV for Project A:

• Time 0: Cash flow = -10,000
• Time 1: Cash flow = 5,000
• Time 2: Cash flow = 4,000
• Time 3: Cash flow = 3,000

\[ NPV_A = \frac{5,000}{(1 + 0.09)^1} + \frac{4,000}{(1 + 0.09)^2} + \frac{3,000}{(1 + 0.09)^3} - 10,000 \]

\[ NPV_A = \frac{5,000}{1.09} + \frac{4,000}{1.1881} + \frac{3,000}{1.295029} - 10,000 \]

\[ NPV_A = 4,587.16 + 3,367.86 + 2,316.99 - 10,000 \]

\[ NPV_A = 10,271.99 - 10,000 = 271.99 \]

Calculating NPV for Project B:

• Time 0: Cash flow = -10,000
• Time 1: Cash flow = 4,000
• Time 2: Cash flow = 3,000
• Time 3: Cash flow = 10,000

\[ NPV_B = \frac{4,000}{(1 + 0.09)^1} + \frac{3,000}{(1 + 0.09)^2} + \frac{10,000}{(1 + 0.09)^3} - 10,000 \]

\[ NPV_B = \frac{4,000}{1.09} + \frac{3,000}{1.1881} + \frac{10,000}{1.295029} - 10,000 \]

\[ NPV_B = 3,669.72 + 2,526.00 + 7,720.68 - 10,000 \]

\[ NPV_B = 13,916.40 - 10,000 = 3,916.40 \]

Conclusion:

• NPV of Project A = 271.99
• NPV of Project B = 3,916.40

Both projects have positive NPVs, but Project B has a higher NPV than Project A. Therefore, WiseGuy Inc should choose Project B.

The answer is B: Project B.

Explanation of Options:

A. Project A - Incorrect, as Project B has a higher NPV. B. Project B - Correct, as it has the highest NPV. C. Neither project - both have negative NPV - Incorrect, as both projects have positive NPVs. D. Both projects - both have positive NPV - Incorrect, as only one project can be chosen, and Project B is the better choice.