Monson Company is considering three investment opportunities with cash flows as
ID: 2389641 • Letter: M
Question
Monson Company is considering three investment opportunities with cash flows as described below (Ignore income taxes):Project A:
Cash investment now $ 13,700
Cash inflow at the end of 5 years $ 21,400
Cash inflow at the end of 8 years $ 21,400
Project B:
Cash investment now $ 11,900
Annual cash outflow for 5 years $ 3,400
Additional cash inflow at the end of 5 years $ 21,700
Project C:
Cash investment now $ 20,400
Annual cash inflow for 4 years $ 10,100
Cash outflow at the end of 3 years $ 4,700
Additional cash inflow at the end of 4 years $ 15,600
Required:
Compute the net present value of each project assuming Monson Company uses a 14% discount rate. (Use Table 12B.1 and Table 12B.2.) (Negative amounts should be indicated by a minus sign. Round "PV factors" to 3 decimal places. Round your intermediate calculations and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
Net Present Value
Project A?
Project B?
Project C?
Explanation / Answer
PV factor of $1 for 3 Yrs @14% = 0.675=PV3 PV factor of $1 for 4 Yrs @14% = 0.592=PV4 PV factor of $1 for 5 Yrs @14% = 0.519=PV5 PV factor of $1 for 8 Yrs @14% = 0.351=PV8 Project A: Cash investment now $ 13,700 Cash inflow at the end of 5 years $ 21,400 Cash inflow at the end of 8 years $ 21,400 NPVa = CF0 + CF5*PV5 + CF8*PV8 ie NPVa = -13700 + 21400*0.519 + 21400*0.351 = $4,918 ....Ans (a) Project B: Cash investment now $ 11,900 Annual cash outflow for 5 years $ 3,400 Additional cash inflow at the end of 5 years $ 21,700 NPVb = CF0 + CF1*PV1+CF2*PV2+CF3*PV3+CF4*PV4+CF5*PV5 ie NPVb = -11900 - 3400*(0.877+0.769+0.675+0.592) + (21700-3400)*0.519 so NPVb = $(12,307) ---........................................................Ans (b) Project C: Cash investment now $ 20,400 Annual cash inflow for 4 years $ 10,100 Cash outflow at the end of 3 years $ 4,700 Additional cash inflow at the end of 4 years $ 15,600 NPVc = CF0 + CF1*PV1+CF2*PV2+CF3*PV3+CF4*PV4 ie NPVc = -20400 + 10100*0.877 + 10100*0.769 + (10100-4700)*0.675 + (10100+15600)*0.592 ie NPVc = $15,084 ..........................Ans (c)