Given the Cash Flow Stream of the Following Mutually Exclusive

question 15

Essay

Given the cash flow stream of the following mutually exclusive projects, prove through the incremental investment that Project B, with the higher NPV, will be preferred to project
A.
0 1 2 3 NPV IRR
Project A: -500 150 245 320 46.39 17.76
Project B: -800 360 360 360 50.01 16.65
Incremental investment in B: -300 210 115 40 NPV = 3.63

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Definitions:

Potential Output

The highest level of real GDP that can be sustained over the long term without increasing inflation, reflecting the economy's maximum productive capacity.

Actual Output

The real quantity of goods and services produced by an economy, as opposed to its potential or desired output.

Long-Run Equilibrium

A state in economics where all factors of production and outputs are fully optimized, with no external pressures causing shifts.

Long-Run Aggregate Supply

The total supply of goods and services that an economy can produce when it is using all of its resources efficiently and sustainably.