Labeau Products, Ltd., of Perth, Australia, has $20,000 to invest. The company i

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: Invest in Project X Invest in Project Y Investment required $ 20,000 $ 20,000 Annual cash inflows $ 8,000 Single cash inflow at the end of 6 years $ 50,000 Life of the project 6 years 6 years The company’s discount rate is 18%. 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).)

Explanation / Answer

Ans) LABEAU PRODUCTS LTD Investment in Project X Investment in Project Y Investment Required 20000 20000 Annual Cash Inflows 8000 Single cash inflow at the end of 6 year 50000 Life of the Project     6 Years    6 Years Investment in Project X P.V.Factor @ 18% P.V Investment Required -20000 1 -20000 Annual Cash Inflows(1-6 YEAR) 8000 3.4976 27980.8 NPV 7980.8 Investment in Project Y P.V.Factor @ 18% P.V Investment Required -20000 1 -20000 Annual Cash Inflows (6 YEAR) 50000 0.37043 18521.5 NPV -1478.5 Project X has a Positive NPV ,so Investment in Project X should be done.

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