Labeau Products, Ltd., of Perth, Australia, has $20,000 to invest. The company i
ID: 2436824 • Letter: L
Question
Labeau Products, Ltd., of Perth, Australia, has $20,000 to invest. The company is trying to decide between two alternative uses for the funds as follows: Invest in Invest in Project X ProjectY s 20,000 $ 20,89 s 6,800 Investment required Annual cash inflows Single cash inflow at the end of 6 years Life of the project 40,000 6 years 6 years The company's discount rate is 16%. Click here to view Exhilbit 138.1 and Exhibit 13B 2 to determine the appropriate discount factorts) 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 accepr?Explanation / Answer
Solution:
Part 1 – Net Present Value of Project X
Year
Project X
Cash Flow
PV factor @ 16%
Present Value
(Cash Flow x PV factor)
0
Initial Investment Required
($20,000)
1.000
($20,000)
1
Annual Cash Inflow
$6,000
0.862
$5,172.41
2
Annual Cash Inflow
$6,000
0.743
$4,458.98
3
Annual Cash Inflow
$6,000
0.641
$3,843.95
4
Annual Cash Inflow
$6,000
0.552
$3,313.75
5
Annual Cash Inflow
$6,000
0.476
$2,856.68
6
Annual Cash Inflow
$6,000
0.410
$2,462.65
Net Present Value
$2,108
Part 2 – Net Present Value of Project Y
Year
Project Y
Cash Flow
PV factor @ 16%
Present Value (Cash Flow x PV factor)
0
Initial Investment Required
($20,000)
1.000
($20,000)
1
$0
0.862
$0.00
2
$0
0.743
$0.00
3
$0
0.641
$0.00
4
$0
0.552
$0.00
5
$0
0.476
$0.00
6
Single Cash inflow at the end of 6 years
$40,000
0.410
$16,417.69
Net Present Value
($3,582)
Part 3 – Project X would be recommended since the project X has positive NPV.
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Year
Project X
Cash Flow
PV factor @ 16%
Present Value
(Cash Flow x PV factor)
0
Initial Investment Required
($20,000)
1.000
($20,000)
1
Annual Cash Inflow
$6,000
0.862
$5,172.41
2
Annual Cash Inflow
$6,000
0.743
$4,458.98
3
Annual Cash Inflow
$6,000
0.641
$3,843.95
4
Annual Cash Inflow
$6,000
0.552
$3,313.75
5
Annual Cash Inflow
$6,000
0.476
$2,856.68
6
Annual Cash Inflow
$6,000
0.410
$2,462.65
Net Present Value
$2,108
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