Explain capital budgeting involves calculation present value

Reference no: EM1312933

Explain Capital budgeting involves calculation of net present value

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 cost of capital when evaluating a high-risk project. The cost of capital used for average-risk projects is 10.5 percent. What is the NPVs for Models A and B ?

Reference no: EM1312933

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