Labeau Products, Ltd., of Perth, Australia, has $26,000 to invest. The company i

Question

Labeau Products, Ltd., of Perth, Australia, has $26,000 to invest. The company is trying to decide between two alternative uses for the funds as follows: The company's discount rate is 12%. Click here to view Exhibit 13B-1 and Exhibit 13B-2. to determine the appropriate discount factor(s) using tables. Determine the net present values. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.) Which alternative would you recommend that the company accept? Project X Project Y

Explanation / Answer

Project X :

Present value of cash inflows = Annual cash flows x PVAi=12%, n=6 = $ 8,000 x 4.111 = $ 32,888

Net present value = $ 32,888 - $ 26,000 = $ 6,888

Project Y:

Present value of cash inflows = $ 50,000 x PVi=12%,n=6   = $ 50,000 x 0.507 = $ 25,350

Net present value is $ 25,350 - $ 26,000 = $ ( 650)

Project X should be accepted.

Now 1 2 3 4 5 6 Project X Initial investment (26,000) Annual cash inflows 8,000 8,000 8,000 8,000 8,000 8,000 Total cash flows (26,000) 8,000 8,000 8,000 8,000 8,000 8,000 Discount factor ( 12%) 1.000 0.893 0.797 0.712 0.636 0.567 0.507 Present value (26,000) 7,144 6,376 5,696 5,088 4,536 4,056 Net present value 6,896 Project Y Initial investment (26,000) Single cash inflows 50,000 Total cash flows ( 26,000) 50,000 Discount factor (12%) 1.000 0.507 Present value (26,000) 25,350 Net present value -650

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