Project A requires an original investment of $65,000. The project will yield cas

Question

Project A requires an original investment of $65,000. The project will yield cash flows of $15,000 per year for seven years. Project B has a calculated net present value of $5,500 over a five year life. Project A could be sold at the end of five years for a price of $30,000.

Below is a table for the present value of $1 at compound interest.

Below is a table for the present value of an annuity of $1 at compound interest.

(a) Using the proper table above determine the net present value of Project A over a five-year life with salvage value assuming a minimum rate of return of 12%.
$

(b) Which project provides the greatest net present value?
-Select-Project BProject AItem 2

Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792   .683 .636 5 .747 .621 .567

Explanation / Answer

a)Present value of cash flow = (PVAF@12%,5 *Cash inflow) +(PVF@12%,7 *Salvage)

                                                  =(3.605* 15000) + (.567* 30000)

                                                  =54075 + 17010

                                                 = 71085

NPV =Present value-Initial investment

       = 71085 - 65000

        = $ 6085

b)Project A should be selected as its NPV is higher than project B.

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