Labeau Products, Ltd., of Perth, Australia, has $25,000 to invest. The company i

Question

Labeau Products, Ltd., of Perth, Australia, has $25,000 to invest. The company is trying to decide between two alternative uses for the funds as follows Invest in Project X $25,000 $ 8,000 Invest in Project Y $25,000 Investment required Annual cash inflows Single cash inflow at the end of 6 years Life of the project $60,000 6 years 6 years The company's discount rate is 16%. Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables Required: a. Determine the net present values. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).) 4. Project X: Initial investment Annual cash inflows Total cash flows Discount factor (16%) Present value Net present value 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ Project Y: Initial investment Single cash inflows Total cash flows Discount factor (16%) Present value Net present value 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $

Explanation / Answer

The other approach:

The cash inlow for project X constitutes an annuity. so,

NPV = - $25000 + $8000 x PVIFA (16%, 6) = -$25000 + $8000 x 3.685 = $4480

For project Y

NPV = -$25000 + $60000 x PVIF (16%, 6) = -$25000 + $60000 x 0.410 = -$400

Note: the diffrences in answer for project X is due to approximation

project X Now 1 2 3 4 5 6 Initial investment $ -25,000.00 Annual cash inflows $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $   8,000.00 Total cash flows $ -25,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $   8,000.00 Discount factor (16%) 1 0.862 0.743 0.641 0.552 0.476 0.410 Present value $ -25,000.00 $ 6,896.00 $ 5,944.00 $ 5,128.00 $ 4,416.00 $ 3,808.00 $   3,280.00 Net present value $     4,472.00 Project Y Now 1 2 3 4 5 6 Initial investment $ -25,000.00 Annual cash inflows $              -   $              -   $              -   $              -   $              -   $ 60,000.00 Total cash flows $ -25,000.00 $              -   $              -   $              -   $              -   $              -   $ 60,000.00 Discount factor (16%) 1 0.862 0.743 0.641 0.552 0.476 0.410 Present value $ -25,000.00 $              -   $              -   $              -   $              -   $              -   $ 24,600.00 Net present value $       -400.00

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.