Labeau Products, Ltd., of Perth, Australia, has $19,000 to invest. The company i
ID: 2389702 • Letter: L
Question
Labeau Products, Ltd., of Perth, Australia, has $19,000 to invest. The company is trying to decide between two alternative uses for the funds as follows: (Ignore income taxes.)Invest in
Project X Invest in
Project Y
Investment required $19,000 $19,000
Annual cash inflows $10,000
Single cash inflow at the end of 8 years $58,000
Life of the project 8 years 8 years
The company's discount rate is 16%.
To determine the appropriate discount factor(s) using tables, click here to view Exhibit 12B-1 and Exhibit 12B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.
Explanation / Answer
NPV of project A = -$19,000 +$10,000/1.16 +$10,000/1.16^2 +....+$10,000/1.16^8 =$24,435.91 NPV of project B = -$19,000 + 58000/(1.16)^8 =-1308.523506 The company should choose Project A
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