Labeau Products, Ltd., of Perth, Australia, has $20,000 to invest. The company i
ID: 2473314 • Letter: L
Question
Labeau Products, Ltd., of Perth, Australia, has $20,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:
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.)
invest in project X Invest in project Y investment required 20,000 20,000 annual cash inflows 6,000 single cash inflow at end of 6 years 40,000 life of project 6 years 6 yearsExplanation / Answer
Project X:
Present value of cash inflows at a discount rate of 16%= Annual cash inflows x PVAi=16%, n=6 = 6,000 x 3.685 = 22,110
Net present value = Present value of cash inflows - Initial investment = 22,110 - 20,000 = 2,110
Project Y:
Present value of cash inflow at a discount rate of 16% = Single cash inflow x PVi=16%,n=6 = 40,000 x 0.410 = 16,400
Net present value = Present value of cash inflow - Initial investment = 16,400 - 20,000 = (3,600)
Project X should be accepted because the NPV is positive, and higher than that of Project Y.
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