Using Net Present Value (NPV) as the criterion: which is a better investment? Pr
ID: 2709643 • Letter: U
Question
Using Net Present Value (NPV) as the criterion: which is a better investment?
Project A - Provides for annual cash flow of $100,000 for 10 years, cost of capital is 10%.
Project B - Provides for annual cash flow of $80,000 for 10 years, cost of capital is 10%.
Project C- Provides for annual cash flow of $100,000 for 8 years, cost of capital is 10%.
Select one:
a. Project A
b. Project B
c. Project C
d. Project A, B & C provide for the same Net Present Value and therefore are all equally beneficial.
e. Not enough information has been provided to answer the question.
Explanation / Answer
Details of initial investment is not provided hence the NPV of the project cannot be calculated and if it is assumed that the initial investment of all the three projects is same then the Project A is much better
Particulars Year PVF @ 10% Cash Flow A Cash Flow B Cash Flow C PV A PV B PV C Cash Inflow 1 0.91 100000 80000 100000 90,909 72,727 90,909 Cash Inflow 2 0.83 100000 80000 100000 82,645 66,116 82,645 Cash Inflow 3 0.75 100000 80000 100000 75,131 60,105 75,131 Cash Inflow 4 0.68 100000 80000 100000 68,301 54,641 68,301 Cash Inflow 5 0.62 100000 80000 100000 62,092 49,674 62,092 Cash Inflow 6 0.62 100000 80000 100000 62,092 49,674 62,092 Cash Inflow 7 0.56 100000 80000 100000 56,447 45,158 56,447 Cash Inflow 8 0.47 100000 80000 100000 46,651 37,321 46,651 Cash Inflow 9 0.42 100000 80000 0 42,410 33,928 - Cash Inflow 10 0.39 100000 80000 0 38,554 30,843 - Present Value of cash Inflows 6,25,233 5,00,186 5,44,269