22.Project A requires an original investment of $51,400. The project will yield
ID: 2599543 • Letter: 2
Question
22.Project A requires an original investment of $51,400. The project will yield cash flows of $14,400 per year for seven years. Project B has a calculated net present value of $3,700 over a four year life. Project A could be sold at the end of four years for a price of $17,200.
Below is a table for the present value of $1 at Compound interest.
Below is a table for the present value of an annuity of $1 at compound interest.
(a) Using the present value tables above, determine the net present value of Project A over a four-year life with salvage value assuming a minimum rate of return of 12%. Round your answer to two decimal places. Enter negative values as negative numbers.
$
(b) Which project provides the greatest net present value?
Project A
Project B
Year 6% 10% 12% 1 0.943 0.909 0.893 2 0.890 0.826 0.797 3 0.840 0.751 0.712 4 0.792 0.683 0.636 5 0.747 0.621 0.567Explanation / Answer
Statement showing Cash flows Project A Particulars Time PVf 12% Amount PV Cash Outflows - 1.00 (51,400.00) (51,400.00) PV of Cash outflows = PVCO (51,400.00) Cash inflows 1.00 0.8930 14,400.00 12,859.20 Cash inflows 2.00 0.7970 14,400.00 11,476.80 Cash inflows 3.00 0.7120 14,400.00 10,252.80 Cash inflows 4.00 0.6360 14,400.00 9,158.40 Cash inflows 4.00 0.6360 17,200.00 10,939.20 PV of Cash Inflows =PVCI 54,686.40 NPV= PVCI - PVCO 3,286.40 Project B has higher NPV since NPV of project B is 3700 whereas NPV of project A is 3,286.40
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