Problem 12-23 Net present value profile [LO4] Keller Construction is considering
ID: 2792090 • Letter: P
Question
Problem 12-23 Net present value profile [LO4]
Keller Construction is considering two new investments. Project E calls for the purchase of earth moving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B.
(A) Determine the net present value of the projects based on a zero discount rate. (Omit the "$" sign in your response.)
Project E Project H ($54,000 investment) ($48,000 investment) Year Cash flow Year Cash flow 1 $ 12,000 1 $ 24,000 2 16,000 2 17,000 3 26,000 3 18,000 4 33,000Explanation / Answer
NPV is calculated by discounting the cashflows
PV = C/(1+r)^n
C - Cashflow
r - Discount rate
n - years to the cashflow
A -
Project E:
NPV = -54000 + 12000/(1+0)^1 + 16000/(1+0)^2 + 26000/(1+0)^3 + 33000/(1+0)^4 = $33000
Project H:
NPV = -48000 + 24000/(1+0)^1 + 17000/(1+0)^2 + 18000/(1+0)^3 = $11000
B:
Project E:
NPV = -54000 + 12000/(1+0.11)^1 + 16000/(1+0.11)^2 + 26000/(1+0.11)^3 + 33000/(1+0.11)^4 = $10545.87
Project H:
NPV = -48000 + 24000/(1+0.11)^1 + 17000/(1+0.11)^2 + 18000/(1+0.11)^3 = $580.65