Roman Knoze is considering two investments. Each will cost $20,000 initially. Pr

Question

Roman Knoze is considering two investments. Each will cost $20,000 initially. Project 1 will return annual cash flows of $10,000 in each of three years. Project 2 will return $5,000 in year 1, $10,000 in year 2, and $15,000 in year 3. Roman requires a minimum rate of return of 10%. What is the net present value of Project 2? Would the project be accepted or rejected? Hint: Refer to present value tables.

a. $24,070 and accept b. $20,000 and accept c. $5,670 and reject d. $2,530 and reject e. $4,070 and accept

Explanation / Answer

NPV of the project 2 is $4079,

So Option (e)is correct i.e: $4,070 and accept

Year Project 1 Project 2 NPV of Project 1 NPV of Project 2 0 -20000 -20000 -20000 -20000 1 10000 5000 9090.909091 4545.454545 2 10000 10000 8264.46281 8264.46281 3 10000 15000 7513.148009 11269.72201 NPV of the Projects 4868.51991 4079.639369

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