The required rate of return for a group of projects that your firm is considerin
ID: 2672128 • Letter: T
Question
The required rate of return for a group of projects that your firm is considering is 9%. The following estimates of expenditures and cash flows have been submitted for your review. Based on this information, using the Net Present Value of the projects which ones will you recommend to the board of directors, and in what order of priority?Project A Project B Project C Project D
Yr0 ($50,000) ($100,000) ($250,000) ($100,000)
Yr1 $30,000 $0 $0 $55,000
Yr2 $30,000 $0 $0 $55,000
Yr3 $30,000 $0 $0 $55,000
Yr4 $30,000 $0 $0 $55,000
Yr5 $30,000 $250,000 $500,000 $0
Explanation / Answer
A. PV of future cash flows = (30000/1.09)+(30000/1.09^2)+(30000/1.09^3)+(30000/1.09^4)+(30000/1.09^5) = $ NPV of Project A = $116,689.5-50,000 =$66,689.5 B. PV of future cash flows = (0/1.09)+(0/1.09^2)+(0/1.09^3)+(0/1.09^4)+(250000/1.09^5) = $162,482.84 NPV of Project B = $162,482.84-100,000 =$62,482.84 C. PV of future cash flows = (0/1.09)+(0/1.09^2)+(0/1.09^3)+(0/1.09^4)+(500000/1.09^5) = $324,965.7 NPV of Project C = $324,965.7-250,000 =$74,965.7 D. PV of future cash flows = (55000/1.09)+(55000/1.09^2)+(55000/1.09^3)+(55000/1.09^4)+(0/1.09^5) = $178,184.5 NPV of Project D = $178,184.5-100,000 =$78,184.5 Hence Project D > C >A >B
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