APPLY THE CONCEPTS: Net present value Project A This project requires an initial
ID: 2448891 • Letter: A
Question
APPLY THE CONCEPTS: Net present value
Project A
This project requires an initial investment of $173,250. The project will have a life of 4 years. Annual revenues associated with the project will be $90,000 and expenses associated with the project will be $40,000 for an annual net cash flow of $.
Note: Enter cash flows as positive numbers.
Project B
This project requires an initial investment of $63,400. The project will have a life of 4 years. Annual revenues associated with the project will be $90,000, and expenses associated with the project will be $70,000, for an annual net cash flow of $.
The cost of capital for the company is 7%.
Use the minus sign to indicate a negative NPV. If an amount is zero, enter"0".
Based upon net present value, which project has the more favorable profit prospects?
Explanation / Answer
PROJECT A
PROJECT B
COST OF CAPITAL=7%
NPV OF PROJECT A=PRESENT VALUE OF CASH INFLOWS-INITIAL INVESTMENT
=$50,000 PVIFA(7%,4)-$173,250
=$50,000*3.387-$1,73,250
=$1,69,350-$1,73,250
= - $ 3,900
NPV OF PROJECT B=PRESENT VALUE OF CASH INFLOWS-INITIAL INVESTMENT
=$20,000PVIFA(10%,4)-$63,400
=$20,000*3.387-$63,400
=$67,740-$63,400
=$4,340
BASED UPON NET PRESENT VALUE PROJECT B HAS MORE FAVOURABLE PROFIT PROSPECTS HAVING A POSITIVE NPV OF $4,340
YEAR NET CASH FLOW($) 0 -$173,250 1 $90,000-$40,000=$50,000 2 $50,000 3 $50,000 4 $50,000