Vasquez Corporation is considering investing in two different projects. It could
ID: 2428511 • Letter: V
Question
Vasquez Corporation is considering investing in two different projects. It could invest in both, neither, or just one of the projects. The forecasts for the projects are as follows.Project A Project B
Capital investment $195,950 $301,810
Net annual cash flows $50,535 $65,116
Length of project 5 years 7 years
The minimum rate of return acceptable to Vasquez is 10%.
Instructions Compute the net present value of the two projects. (Round answers to 0 decimal places, e.g. 125. If amount is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45).)
PROJECT A $
PROJECT B $
What capital budgeting decision should Vasquez make? Invest in
Project A could be modified. By spending $19,395 more initially, the net annual cash flows could be increased by $10,160 per year.
Calculate the new net present value. $ ______________What project(s) should Vasquez's invest in?
Explanation / Answer
Sum of Present Values for Project A (NPV); Year 0 = -195950 Year 1 = 50535 * (1.1)^(-1) = 45,940.91 Year 2 = 50535 * (1.1)^(-2) = 41,764.46 Year 3 = 50535 * (1.1)^(-3) = 37,967.69 Year 4 = 50535 * (1.1)^(-4) = 34,516.08 Year 5 = 50535 * (1.1)^(-5) = 31,378.26 NPV = -4382.59 Project A has a negative NPV. Reject. Alternatively, in the Financial Calculator; CF0 = -195,950 CF1 = 50535 N1 = 5 I = 10% Calculate NPV = -4382.59 Project B (I will only use the financial calculator since the method is the same); CF0 = -301810 CF1 = 65,116 N1 = 7 I = 10% Calculate NPV = 15,201.96 Accept Project B; it has a positive NPV Alternative to Project A; CF0 = -195,950 + -19,395 = -215,345 CF1 = 50535 + 10,160 = 60695 N1 = 5 I = 10% Calculate NPV = 14,736.80 The alternate of Project A has a positive NPV. In this case, accept both Project A and Project B (assuming they are not mutually exclusive).
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