APPLY THE CONCEPTS: Net present value Project A This project requires an initial
ID: 2460353 • Letter: A
Question
APPLY THE CONCEPTS: Net present value
Project A
This project requires an initial investment of $186,120. The project will have a life of 4 years. Annual revenues associated with the project will be $75,000 and expenses associated with the project will be $15,000 for an annual net cash flow of $.
Note: Enter cash flows as positive numbers.
Project B
This project requires an initial investment of $210,600. The project will have a life of 4 years. Annual revenues associated with the project will be $80,000, and expenses associated with the project will be $15,000, for an annual net cash flow of $.
The cost of capital for the company is 8%.
Use the minus sign to indicate a negative NPV. If an amount is zero, enter"0".
Based upon net present value, which project has the more favorable profit prospects A or B?
Cash Flows Year 0 -$186,120 Year 1 Year 2 Year 3 Year 4Explanation / Answer
Project A
Year
Cash flow
PV Factor @ 8%
PV
0
(186,120)
1.0000
(186,120.00)
1-4
60,000
3.3120
198,720.00
NPV
12,600.00
Project B
Year
Cash flow
PV Factor @ 8%
PV
0
(210,600)
1.0000
(210,600.00)
1-4
65,000
3.3120
215,280.00
NPV
4,680.00
Project A is more profitable as NPV is higher
Project A
Year
Cash flow
PV Factor @ 8%
PV
0
(186,120)
1.0000
(186,120.00)
1-4
60,000
3.3120
198,720.00
NPV
12,600.00
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