Payne Medical Labs Solution: Product 1 Years Product 1 Product 2 Year Inflows PV

Question

Payne Medical Labs Solution: Product 1




Years Product 1 Product 2
Year Inflows PVIF @ 10% PV




1 $25,000 $16,000
1 $25,000




2 $30,000 $22,000
2 $30,000




3 $38,000 $34,000
3 $38,000




4 $31,000 $29,000
4 $31,000




5 $19,000 $70,000
5 $19,000










PV of Inflows




Additional Information


Investment $90,000




Discount Rate - Product 1 10%


Net Present Value




Discount Rate - Product 2 15%









Investment $90,000
Product 2








Year Inflows PVIF @ 15% PV








1 $16,000








2 $22,000








3 $34,000








4 $29,000








5 $70,000










PV of Inflows










Investment $90,000










Net Present Value



















Which product should be selected using net present value analysis?

Explanation / Answer

Project 1 is better since it has higher NPV than Project 2

Project 1 Year Inflows PV @ 10% PV 1           25,000 0.909             22,725 2           30,000 0.826             24,780 3           38,000 0.751             28,538 4           31,000 0.683             21,173 5           19,000 0.621             11,799 PV of Inflows =          109,015 Investment = 90,000 NPV =             19,015 Project 2 Year Inflows PV @ 15% PV 1           16,000 0.870             13,920 2           22,000 0.756             16,632 3           34,000 0.658             22,372 4           29,000 0.572             16,588 5           70,000 0.497             34,790 PV of Inflows =          104,302 Investment = 90,000 NPV =             14,302

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