Consider two mutually exclusive projects that will be conducted for a total of 6
ID: 2586928 • Letter: C
Question
Consider two mutually exclusive projects that will be conducted for a total of 6 years. Project A lasts 3 years (so it will need to be repeated 1 time) and has the following cash flow: Year 0 -$19,000; Year 1 $15,000; Year 2 $12,000; Year 3 $12,000. Project B lasts 2 years (so it will need to be repeated 2 times) and has the following cash flow: Year 0 -$29,000; Year 1 $22,000; Year 2 $17,000. Assume both projects can be repeated with the identical cash flows. The interest rate is 18.3%. Provide the net present worth for 6 YEARS of the project that you should select. If neither project should be selected, enter 0.
Explanation / Answer
1. Calculation of Present value of cash flows of project which will last for 3 years.
Particulars
Amount (In $)
(A)
Time(n)
Present Value Factor (1/ (1.183)n), i=18.3%
(B)
Present Value Amount (In $)
(A x B)
Cash Outflows:
Initial Investment
19,000
0
1
19,000
Repeat of Investment
19,000
3 (end of 3rd year)
.604
11,476
TOTAL CASH OUTFLOWS
30,476
Cash Inflows
Cash Inflows year 1
15,000
1
.845
12,675
Cash Inflows year 2
12,000
2
.714
8,568
Cash Inflows year 3
12,000
3
.604
7,248
Cash Inflows year 4
15,000
4
.510
7,650
Cash Inflows year 5
12,000
5
.431
5,172
Cash Inflows year 6
12,000
6
.364
4368
Total Present value of cash inflows
45,681
NPV
15,205
2 year project
Particulars
Amount (In $)
(A)
Time(n)
Present Value Factor (1/ (1.183)n), i=18.3%
(B)
Present Value Amount (In $)
(A x B)
Cash Outflows:
Initial Investment
29,000
0
1
29,000
Repeat at year 2
29,000
2
.714
20,706
Repeat at year 4
29,000
4
.510
14,790
TOTAL CASH OUTFLOWS
64,496
Cash Inflows
Cash Inflows year 1
22,000
1
.845
22,000
Cash Inflows year 2
17,000
2
.714
12,138
Cash Inflows year 3
22,000
3
.604
13,288
Cash Inflows year 4
17,000
4
.510
8,670
Cash Inflows year 5
22,000
5
.431
9,482
Cash Inflows year 6
17,000
6
.364
6,188
Total Present value of cash inflows
71766
NPV
7,270
Since the Present Value of Cash inflows is more in project with life of 3 years. The same should be accepted
Particulars
Amount (In $)
(A)
Time(n)
Present Value Factor (1/ (1.183)n), i=18.3%
(B)
Present Value Amount (In $)
(A x B)
Cash Outflows:
Initial Investment
19,000
0
1
19,000
Repeat of Investment
19,000
3 (end of 3rd year)
.604
11,476
TOTAL CASH OUTFLOWS
30,476
Cash Inflows
Cash Inflows year 1
15,000
1
.845
12,675
Cash Inflows year 2
12,000
2
.714
8,568
Cash Inflows year 3
12,000
3
.604
7,248
Cash Inflows year 4
15,000
4
.510
7,650
Cash Inflows year 5
12,000
5
.431
5,172
Cash Inflows year 6
12,000
6
.364
4368
Total Present value of cash inflows
45,681
NPV
15,205