Pinkerton Truck Rental is considering two mutually exclusive engine development projects.The RPX design has an expected life of four years and projected cash inflows are $3.6 million at the end of each of the first two years and $1.8 million in each of the next two years.The RPB design is more flexible and has an eight-year life.The projected end-of-year flows from the RPB design are $2.4 million in each of the first two years and $2.0 million in each of the next six years.Both projects require an initial investment of $5.4 million,and Pinkerton's cost of capital is 12%.What is the NPV (on an eight-year extended basis) of the project with the most value to the company?

A) $3.976 million
B) $4.325 million
C) $5.085 million
D) $5.211 million

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Cindy Duran · Accepted Answer

Final Answer : D, Explanation :  To find the project with the most value, we calculate the NPV of both projects over an eight-year period, considering the cost of capital at 12%. For the RPX design, since it only lasts for four years, we assume it is repeated once more to match the eight-year comparison period. The RPB design already spans eight years. Calculating the NPV for both and comparing them shows that the RPB design, with the highest NPV, provides the most value to the company.

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