Hittle Company is considering two mutually exclusive projects X and Y. The cost
ID: 2732895 • Letter: H
Question
Hittle Company is considering two mutually exclusive projects X and Y. The cost of capital for each project is 10%. The projects’ expected net cash flows are as follows:
Year Project X Project Y
0 -$10,000 -$10,000
1 4,500 3,500
2 3,000 3,500
3 3,000 3500
4 3000 3500
5 3600 3500
What are the correct NPVs of projects X and Y, respectively?
$3000.50 (X), $3100 (Y)
$3108.55 (X), $3267.75 (Y)
$7100 (X), $7500(Y)
$3267.75 (X), $3108.55 (Y)
1.$3000.50 (X), $3100 (Y)
2.$3108.55 (X), $3267.75 (Y)
3.$7100 (X), $7500(Y)
4.$3267.75 (X), $3108.55 (Y)
Explanation / Answer
Project X Project Y NPV calculation PV factor @10% Cash Flows PV of Cash flows Cash Flows PV of Cash flows Year Year 0 1.00 (10,000) (10,000.00) (10,000) (10,000.00) Year 1 0.909 4,500 4,090.91 3,500 3,181.82 Year 2 0.826 3,000 2,479.34 3,500 2,892.56 Year 3 0.751 3,000 2,253.94 3,500 2,629.60 Year 4 0.683 3,000 2,049.04 3,500 2,390.55 Year 5 0.621 3,600 2,235.32 3,500 2,173.22 NPV =sum pf PV of Cash flows $ 3,108.55 $ 3,267.75 So Option 2 is correct.
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