Project 1 requires an original investment of $104,700. The project will yield ca
ID: 2455416 • Letter: P
Question
Project 1 requires an original investment of $104,700. The project will yield cash flows of $22,000 per year for five years. Project 2 has a calculated net present value of $25,500 over a three-year life. Project 1 could be sold at the end of three years for a price of $82,000.
Use the Present Value of $1 at Compound Interest and the Present Value of an Annuity of $1 at Compound Interest tables shown below.
a. Determine the net present value of Project 1 over a three-year life with residual value, assuming a minimum rate of return of 6%. If required, round to the nearest dollar.
$
b. Which project provides the greatest net present value?
Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162Explanation / Answer
Project B is having a higher net present value i.e 25500 hence project B should be accepted
Particulars Year Cash Flows PVF @ 6% PV Original investment 0 -104700 1 -104700 Cash Flows 1 22000 0.943 20746 Cash Flows 2 22000 0.89 19580 Cash Flows 3 22000 0.84 18480 Cash Flows 3 82000 0.84 68880 Net Present Value 22986Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.