Company X received the approval to start no more than two projects in the current calendar year. Three different projects were recommended, each of which requires an investment of 800 to be made at the beginning of the year.

The cash flows for each of the three projects are as follows

End of Year	Project A	Project B	Project C
1	500	500	500
2	500	300	250
3	-175	-175	-175
4	100	150	200
5	0	200	200

The company uses an annual effective interest rate of 10% to discount its cash flows. Determine which combination of projects the company should select.

• Projects A and B
• Projects B and C
• Projects A and C
• Project A only
• Project B only

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.

Solution: D

Discounting at 10%, the net present values are 4.59, –2.36, and –9.54 for Projects A, B, and C respectively. Hence, only Project A should be funded. Note that Project C’s net present value need not be calculated. Its cash flows are the same as Project B except being 50 less at time 2 and 50 more at time 4. This indicates Project C must have a lower net present value and therefore be negative.

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.