2. Project A requires an original investment of $65,000. The project will yield

Question

2. Project A requires an original investment of $65,000. The project will yield cash o of $15,000 per year for 5 years. Project B has a calculated net present value of $500 over a 5-year life Project A could be sold at the end of 5 years for a price oss. (a) Using the table below, determine the net present value of Project A over a with salvage value assuming a minimum rate of return of 12%. (b) which project provides the greatest net present value? 500 5-year Below is a table for the present value of $1 at compound interest Year 6% 0.943 0.890 0.840 0.792 0.747 10% 0.909 0.826 0.751 0.683 0.621 12% 0.893 0.797 0.712 0.636 0.567 2 3 4 interest Below is a table for the present value of an annuity of $1 at compound 10% 0.909 1.736 2.487 3.170 3.791 12% 0.893 1.690 2.402 3.037 3.605 Year 6% 0.943 1.833 2.673 3.465 4.212 3 5

Explanation / Answer

a)

Initial investment = 65000

Cash flow for 4 year =15000

cash flow on the 5 th year = 15000+30000=45000

=4 year cash flow 12% annuity factor +5th year cash flow × 5 th years 12 % present value factor

=15000×3.037=45555

=45000×.567 = 25515

=45555+25515=71070

Net Present Value = present value of future cash flow- initial investment

=71070-65000=6070

b) PROJECT A have greatest Net Present Value

( Project B have 5500 as NPV ,A have 6070 as NPV)

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