Red Rider Company Red Rider Company is considering three investment opportunitie

Question

Red Rider Company

Red Rider Company is considering three investment opportunities having cash flows as described below:

Project A Cash investment now $10,000
Cash inflow at the end of 4 years $15,000
Cash inflow at the end of 7 years $20,000

Project B Cash investment now $15,000
Annual cash outflow for 4 years $6,000
Additional cash inflow at the end of 4 years $15,000

Project C Cash investment now $15,000
Annual cash inflow for 4 years $15,000
Cash outflow at the end of 3 years $3,000
Additional cash inflow at the end of 4 years $15,000

Red Rider Company uses a 11% required rate of return to evaluate investments.

Required: Calculate the net present value of each project.

based on net present vaue only, rank the projects in terms of acceptance.

Explanation / Answer

PV = FV / ( 1 + rate / 100) ^T

PROJECT A,

NPV = -10000 + 15000/ ( 1 +11/100) ^4 + 20000/ ( 1 +11/100) ^7 = $9514.13

PROJECT B,

NPV = -15000 + 6000/ ( 1 +11/100) ^1 + 6000/ ( 1 +11/100) ^2 + 6000/ ( 1 +11/100) ^3 +  6000/ ( 1 +11/100) ^4+ 15000/ ( 1 +11/100) ^4 =

NPV = -15000 + 18614.67 + 9880.96 = $ 13495.63

PROJECT C,

NPV = -15000 + 15000/ ( 1 +11/100) ^1 + 15000/ ( 1 +11/100) ^2 + 15000/ ( 1 +11/100) ^3 + 15000/ ( 1 +11/100) ^4 - 3000/ ( 1+ 11/100) ^3 + 15000/ ( 1 +11/100) ^4 =

NPV = -15000 + 46536.67 - 2193.57 + 9880.96 = $ 39224.06

Rank C > B > A

Note : Annual cash outflow for 4 years $6,000 in Project B, should be Annual cash inflow for 4 years $6,000.

As the next statement as mentioned additional cash inflow. Also, such a large cash flow does not make sense for comparision. So, please rectify.

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