The following data have been estimated for two feasible investments, A and B, fo
ID: 2713324 • Letter: T
Question
The following data have been estimated for two feasible investments, A and B, for which revenues as well as costs are known and which have different lives. If the minimum attractive rate of return is 10%, show which feasible alternative is more desirable by using NPW method. What is the difference in the NPW B -NPWA assuming repeatability?
A
B
Investment (first) cost
$3,500
$5,000
Annual revenue
1,900
2,500
Annual cost
645
1,383
Useful life (years)
4
8
Salvage value at end of useful
400
900
Calculate using excel forumlas
A
B
Investment (first) cost
$3,500
$5,000
Annual revenue
1,900
2,500
Annual cost
645
1,383
Useful life (years)
4
8
Salvage value at end of useful
400
900
Explanation / Answer
Since NPV of B is higher, project B is better
Year 0 1 2 3 4 Initial Investment -3500 Revenue 1900 1900 1900 1900 Cost 645 645 645 645 Salvage Value 400 Net Cash Flow -3500 1255 1255 1255 1655 Discount Factor at 10% 0.909091 0.826446 0.751315 0.683013 Net Cash Flow -3500 1140.909 1037.19 942.9001 1130.387 Net Present Value of A $ 751.39 Project B Year 0 1 2 3 4 5 6 7 8 Initial Investment -5000 Revenue 2500 2500 2500 2500 2500 2500 2500 2500 Cost 1383 1383 1383 1383 1383 1383 1383 1383 Salvage Value 900 Net Cash flow -5000 1117 1117 1117 1117 1117 1117 1117 2017 Discount Factor at 10% 0.909091 0.826446 0.751315 0.683013 0.620921 0.564474 0.513158 0.466507 Net Cash flow -5000 1015.455 923.1405 839.2186 762.926 693.5691 630.5174 573.1976 940.9454 Net Present Value of B $ 1,378.97Related Questions
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