Net Present Value-Unequal Lives Project 1 requires an original investment of $82
ID: 2538553 • Letter: N
Question
Net Present Value-Unequal Lives Project 1 requires an original investment of $82,300. The project will yield cash flows of $20,000 per year for six years. Project 2 has a calculated net present value of $23,200 over a four-year life. Project 1 could be sold at the end of four years for a price of $80,000 Use the Present Value of $1 at Compound Interest and the Present Value of an Annuity of $1 at Compound Interest tables shown below Present Value of $1 at Compound Interest 10% 12% 15% 0.943 0.909 0.893 0.870 0.890 0.826 0.7970.756 0.840 0.751 0.7120.658 0.792 0.683 0.636 0.572 0.7470.621 0.567 0.497 0.705 0.564 0.507 0.432 0.665 0.513 0.452 0.376 0.627 0.467 0.4040.327 0.284 0.558 0.386 0.322 0.247 Year 2090 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 690 4 0.592 0.424 0.361 10Explanation / Answer
Answer a.
Project A:
Investment = $82,300
Annual Cash Flow = $20,000
Residual Value = $23,200
Life = 4 years
NPV = -$82,300 + $20,000 * PVA of $1 (15%, 4) + $23,000 * PV of $1 (15%, 4)
NPV = -$82,300 + $20,000 * 2.855 + $23,000 * 0.572
NPV = -$12,044
Answer b.
Project B has greatest NPV