Net present value. Lepton Industries has four potential projects, all with an in
ID: 2620519 • Letter: N
Question
Net present value. Lepton Industries has four potential projects, all with an initial cost of $1,500,000. The capital budget for the year will allow Lepton to accept only one of the four projects. Given the discount rate and the future cash flow of each project, determine which project Lepton should accept. Year 1 Year 2 Year 3 Year 4 Year 5 Discount rate Project Q $350,000 $350,000 $350,000 $350,000 $350,000 4% Project R $400,000 $400,000 $400,000 $400,000 $400,000 5% Project S $700,000 $600,000 $500,000 $400,000 $300,000 13% Project T $200,000 $400,000 $600,000 $800,000 $1,000,000 18% Which project should Lepton accept? (Select the best response.) A. None of the projects O B. Project S O C. Project Q O D. Project T OE. Project RExplanation / Answer
Q:
Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$350,000[1-(1.04)^-5]/0.04
=$350,000*4.451822331
=$1558137.82
NPV=Present value of inflows-Present value of outflows
=$1558137.82-$1,500,000
=$58137.82
R:
Present value of inflows=$400,000[1-(1.08)^-5]/0.08
=$400,000*3.992710037
=$1597084.02
NPV =$1597084.02-$1,500,000
=$97084.02
S:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=700,000/1.13+600,000/1.13^2+500,000/1.13^3+400,000/1.13^4+300,000/1.13^5
=$1844037.59
NPV =$1844037.59-$1,500,000
=$344037.59(Approx).
T:
Present value of inflows=200,000/1.18+400,000/1.18^2+600,000/1.18^3+800,000/1.18^4+1,000,000/1.18^5
=$1671684.14
NPV =$1671684.14-$1,500,000
=$171684.14(Approx).
Hence Project S must be selected having highest NPV.