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Question
Real Time Systems Inc. is considering the development of one of two mutually exclusive new computer models. Each will require a net investment of $5,000. The cash flow figures for each project are shown below:
Period Project A Project B
1 $2,000 $3,000
2 2,500 2,600
3 2,250 2,900
Model B, which will use a new type of laser disk drive, is considered a high-risk project, while Model A is of average risk. Real Time adds 2 percentage points to arrive at a risk-adjusted discount rate when evaluating a high-risk project. The rate used for average risk projects is 12 percent. Which of the following statements regarding the NPVs for Models A and B is most correct?
a. NPVA = $380; NPVB = $1,815.
b. NPVA = $197; NPVB = $1,590.
c. NPVA = $380; NPVB = $1,590.
d. NPVA = $5,380; NPVB = $6,590.
e. None of the above statements is correct.
Answer
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