Real Time Systems Inc Model B, Which Will Use a New Type of Laser

question 89

Multiple Choice

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:
$\begin{array}{ccc}\underline{\text { Period }}&\underline{\text { Project A} } &\underline{\text { Project B }} \\1 & \$ 2,000 & \$ 3,000 \\2 & 2,500 & 2,600 \\3 & 2,250 & 2900\end{array}$
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.

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