Dravid, Inc., is currently evaluating three projects that are independent. The c

Question

Dravid, Inc., is currently evaluating three projects that are independent. The cost of funds can be either 13.6 percent or 14.8 percent depending on their financing plan. All three projects cost the same at $500,000. Expected cash flow streams are shown in the following table. If the appropriate discount rate is 14.8%:

(Round your answer to 2 decimal places. All intermittent calculations should be rounded to 4 decimal places before carrying to next calculation. If the number is negative identify with a negative symbol (-). The company should pick all projects with a positive NPV)

NPV of project 1 is $
NPV of project 2 is $
NPV of project 3 is $
Dravid should accept project(s) 1 and 331 and 22 and 3all projectsnone of the projects21.

If the appropriate discount rate is 13.6 percent:
NPV of project 1 is $
NPV of project 2 is $
NPV of project 3 is $
Dravid should accept project(s) 12 and 32all projects1 and 23none of the projects1 and 3.

Year Project 1 Project 2 Project 3
1 0 0 $297,508
2 $105,463 0 $178,383
3 $182,790 $561,300 $136,260
4 $431,100 $377,050 $74,451

Explanation / Answer

If the appropriate discount rate is 14.8% NPV of project 1= 0+(105463/1.148^2)+(182790/1.148^3)+(431100/1.148^4)-500000= $-50955.108 NPV of project 2= 0+0+(561300/1.148^3)+(377050/1.148^4)-500000=$88081.917 NPV of project 3=(297508/1.148)+(178383/1.148^2)+(136260/1.148^3)+(74451/1.148^4)-500000= $27434.1219 Dravid should accept projects 2 and 3 since they have positive NPV If the appropriate discount rate is 13.6% NPV of project 1= 0+(105463/1.136^2)+(182790/1.136^3)+(431100/1.136^4)-500000= $-34731.38 NPV of project 2 =0+0+(561300/1.136^3)+(377050/1.136^4)-500000= $109282.47 NPV of project 3=(297508/1.136)+(178383/1.136^2)+(136260/1.136^3)+(74451/1.136^4)-500000= $377770.78 Dravid should accept projects 2 and 3 since they have positive NPV

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