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Tremaine Company is considering two mutually exclusive long-term investment proj

ID: 2482306 • Letter: T

Question

Tremaine Company is considering two mutually exclusive long-term investment projects. Project ABC would require an investment of $240,000, have a useful life of 4 years, and annual cash flows of $78,000. Project XYZ would require an investment of $230,000, have a useful life of 5 years, and annual cash flows of $66,000. Cost of capital is 12 percent.

    

Calculate NPV. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided.)

                                                PROJECT ABC

                                                        

                                                         PROJECT XYZ

Tremaine Company is considering two mutually exclusive long-term investment projects. Project ABC would require an investment of $240,000, have a useful life of 4 years, and annual cash flows of $78,000. Project XYZ would require an investment of $230,000, have a useful life of 5 years, and annual cash flows of $66,000. Cost of capital is 12 percent.

Explanation / Answer

Solution:

Calculation of Net Present Value (NPV)

Net Present Value = Present Value of Cash Flow - Present Value of Cash Outlfow (Initial Investment)

Project ABC

NPV = ($78,000 x 3.0373) - $240,000

= $236,909 - $240,000

= $3,091

Project XYZ

Net Present Value = ($66,000 x 3.6048) - $230,000

= $237,917 - $230,000

= $7,917

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