Labeau Products, Ltd., of Perth, Australia, has $34,000 to invest. The company i
ID: 2413205 • Letter: L
Question
Labeau Products, Ltd., of Perth, Australia, has $34,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:
The company’s discount rate is 14%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the net present value of Project X.
2. Compute the net present value of Project Y.
3. Which project would you recommend the company accept?
Invest inProject X Invest in
Project Y Investment required $ 34,000 $ 34,000 Annual cash inflows $ 9,000 Single cash inflow at the end of 6 years $ 60,000 Life of the project 6 years 6 years
Explanation / Answer
Formula for Net present value = Discounted Inflows - Discounted outflows
1. Net present value of Project X can be calculated as follows:
Net present value = Discounted Inflows - Discounted outflows
= 35,000 - 34000 = $1,000
The net present value of Project X = $1,000.
2. Net present value of Project Y can be calculated as follows:
Net present value = Discounted Inflows - Discounted outflows
= 27,336 - 34000 = - $6,664
The net present value of Project Y = - $6,664.
3. It is recommended to invest in project X as the Net present value of Project X is greater than Project Y.
End of Year Cash Flow Present value factor @14% Discounted Cash Flow 0 (34000) 1 (34000) 1-6 9000 3.8887 35000 Total Inflows 35,000Related Questions
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