Net Present Value—Unequal Lives Project 1 requires an original investment of $55

Question

Net Present Value—Unequal Lives

Project 1 requires an original investment of $55,300. The project will yield cash flows of $12,000 per year for eight years. Project 2 has a calculated net present value of $12,400 over a six-year life. Project 1 could be sold at the end of six years for a price of $53,000.

Use the Present Value of $1 at Compound Interest and the Present Value of an Annuity of $1 at Compound Interest tables shown below.

a. Determine the net present value of Project 1 over a six-year life with residual value, assuming a minimum rate of return of 15%. If required, round to the nearest dollar.
$

b. Which project provides the greatest net present value?
SelectProject 1Project 2

Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162

Explanation / Answer

Projec 1 NPV Cost of Machine -55300.00 Present value of $12,000 per year at 15% for 6 years 12000*3.784 45408.00 Present value of $53000 at 15% at the end of 6 years 22896.00 NPV 13004.00 Projec 2 NPV 12500 Project 1 has the highest NPV hence Project 1 May be selected

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