Harriman Enterprises has three possible projects. Each project requires the same

Question

Harriman Enterprises has three possible projects. Each project requires the same initial investment of $1,000,000. Harriman's chief financial officer has prepared the following cash flow projections for each project:

Jim Harriman, the company's president, is unsure of which project to pursue. Each holds promise for the company, but he is confused about what to do because each project generates the same amount of cash flow over the four-year period.

Ignoring taxes, compute the net present value of each project at a 15 percent cost of capital.

Explanation / Answer

DIsc rate 15% NPV of Proj X = NPV(Rate,CF1...CF4) + CF0 = NPV(15%,1250000,1250000,1250000,1250000,) - 1000000 = $2,568,723 NPV of Proj Y = NPV(15%,0,0,0,5000000) - 1000000 = $1,858,766 NPV of Proj Z = NPV(15%,500000,2000000,2000000,500000) - 1000000 = $2,547,979 Using excel PV function, Proj X: We have PV of CFs = Proj Y , PV of CF = 2,858,766.23 So NPV = 2,858,766.23 -1000000 = $1,858,766.23 Proj Z, PV of CF = 3,547,979.03 So NPV = 3,547,979.03 - 1000000 = 2,547,979.03 So Proj X with highest NPV should be selected.

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