four projects are under consideration by a company that has a MARR of 15% per ye

Question

four projects are under consideration by a company that has a MARR of 15% per year compounded annually. the net cash flows are given below.

net cash flow year 0: project A: -10,000 project B: -20,000 project C: -40,000 project D: -30,000

net cash flow years 1-5: project A: 3,000
project B: 6,000 project C: 12,000 project D: 11,000

projects A,B and C are mutually exclusive, and project D is independent of the rest.

(a) list all feasible alternatives (b) determine the best alternative by the appropriate calculations.

Explanation / Answer

Project A Details   Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment          (10,000) Cash Inflows          3,000           3,000           3,000           3,000           3,000 Net Cash flows        (10,000)          3,000           3,000           3,000           3,000           3,000 PV Factor @15%                     1          0.870           0.756           0.658           0.572           0.497 PV of Net Cash flows        (10,000)          2,609           2,268           1,973           1,715           1,492 NPV = $         56.47 Profitability Index =PI=           1.0056 Project B Details   Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment          (20,000) Cash Inflows          6,000           6,000           6,000           6,000           6,000 Net Cash flows        (20,000)          6,000           6,000           6,000           6,000           6,000 PV Factor @15%                     1          0.870           0.756           0.658           0.572           0.497 PV of Net Cash flows        (20,000)          5,217           4,537           3,945           3,431           2,983 NPV = $      112.93 Profitability Index =PI=           1.0057 Project C   Details   Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment          (40,000) Cash Inflows        12,000         12,000         12,000        12,000         12,000 Net Cash flows        (40,000)        12,000         12,000         12,000        12,000         12,000 PV Factor @15%                     1          0.870           0.756           0.658           0.572           0.497 PV of Net Cash flows        (40,000)        10,435           9,074           7,890           6,861           5,966 NPV = $      225.86 Profitability Index =PI=           1.0057 Project D Details   Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment          (30,000) Cash Inflows        11,000         11,000         11,000        11,000         11,000 Net Cash flows        (30,000)        11,000         11,000         11,000        11,000         11,000 PV Factor @15%                     1          0.870           0.756           0.658           0.572           0.497 PV of Net Cash flows        (30,000)          9,565           8,318           7,233           6,289           5,469 NPV = $   6,873.71 NPV details A+D B+D C+D Cumulative NPV =       6,930.17    6,986.64     7,099.57 Best Alternative is Project C & D

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