Exercise 11-11 Comparison of Projects Using Net Present Value LO11-2] Labeau Pro
ID: 2536934 • Letter: E
Question
Exercise 11-11 Comparison of Projects Using Net Present Value LO11-2] Labeau Products, Ltd., of Perth, Australia, has $12,000 to invest. The company is trying to decide between two alternative uses for the funds as follows Invest in Invest in Project XProjectY 12,000 12,000 Investment required Annual cash inflows Single cash inflow at the end of 6 years Life of the project $ 4,000 $28,000 6 years 6 years The company's discount rate is 16% 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 Project X Project Y Net Present Value b. Which alternative would you recommend that the company accept? O Project X O Project YExplanation / Answer
Answer
Project X
Initial Cash Outflow = $12,000
Annual Cash Inflow = $4,000
Life = 6 Years
Present Value Annuity Factor (PVAF) @16% for 6 Years = 3.6847359
PV of Cash Inflow = PVAF @16% for 6 Years * Annual Cash Inflow
= 3.6847359 * $4,000
PV of Cash Inflow = $14,738.94
NPV = PV of Cash Inflow – Initial Cash outflow
= $14,738.94 – 12,000
NPV of Project X = $2,738.94
Project Y
Initial Cash Outflow = $12,000
Cash Inflow at the end of 6 Year = $28,000
Life = 6 Years
Present Value (PV) @16% of 6th year = 0.41044225
PV of Cash Inflow = PV @16% of 6th Year * Cash Inflow at end of 6th year
= 0.41044225 * $28,000
PV of Cash Inflow = $11,492.38
NPV = PV of Cash Inflow – Initial Cash outflow
= $11,492.38 – 12,000
NPV of Project Y = ($507.62)
b.
It is recommended to Choose Project X as NPV is positive in this case and Project is financially viable.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.