Question
Consider the following three investment opportunities: Project I would require an immediate cash outlay of $10,000 and would result in cash savings of $3,000 each year for 5 years. Project II would require cash outlays of $3, 000 per year and would provide a cash inflow of $30,000 at the end of 5 years. Project III would require a cash outlay of $10,000 now and would provide a cash inflow of $30,000 at the end of 5 years. The discount rate is 14%. Use the net present value method to determine which, if any. of the three projects is acceptable.
Explanation / Answer
Solution.
1.
2.
3.
Year Cash Flow P.V factore P.V 0 (10,000.00) 1.0000 (10,000.00) 1 3,000.00 0.8771 2,631.30 2 3,000.00 0.7694 2,308.20 3 3,000.00 0.6749 2,024.70 4 3,000.00 0.5920 1,776.00 5 3,000.00 0.2193 657.90 NPV (601.90)