14.1
Consider the following two projects:
| Year 0 | Year 1 | Year 2 | Year 3 | |
| A | -40 | 20 | -10 | 40 |
| B | -100 | 60 | 0 | 70 |
The opportunity cost of capital for both projects is 10%.
\( \Large NPV(A) = -40+ \frac{20}{(1.10)^{1} } - \frac{10}{(1.10)^{2}} + \frac{40}{(1.10)^{3}} = -{$}0.03\)
\( \Large NPV(B) = -100+ \frac{60}{(1.10)^{1} } - \frac{0}{(1.10)^{2}} + \frac{70}{(1.10)^{3}} = {$}7.14\)
If you could only take one, you would take the
one with the higher NPV, B, because it adds $7.14 to the
value of the firm compared with -$0.03 for A.