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Question:
You are now working as a project manager for Wedding Planners. Because every wedding is unique, each of which is believed to be treated as a separate project. You’ve come up with a great idea for a new event, which definitely satisfies the customer and profits the company. After expressing this idea to your boss, you are asked to investigate alternative methods to implement it and come back with a recommendation. You find that Alternative A could yield revenues of $21 million over the next two years, while Alternative B could yield revenues of $29 million but in 1-year lag. You were told by the finance manager to use 5 percent as the cost of capital. Which project is the better choice? Why?
A
Alternative B, because its yield is higher than Alternative A’s yield.
explanation
To compare the value of Alternative A to Alternative B, we must analyze the discounted cash flow. Applying the present value formula:
Alternative A: $21,000,000 / (1 + .05)2 = $19,047,619.
Alternative B: $29,000,000 / (1 + .05)3 = $25,051,831.
Therefore, Alternative B is much optimum because its profit is higher than Alternative A's.
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