Tremaine Company is considering two mutually exclusive long-term investment proj

Question

Tremaine Company is considering two mutually exclusive long-term investment projects. Project ABC would require an investment of $240,000, have a useful life of 4 years, and annual cash flows of $78,000. Project XYZ would require an investment of $230,000, have a useful life of 5 years, and annual cash flows of $66,000. Cost of capital is 12 percent.

                                            Project ABC

                                             

                                                    Project XYZ

Which project do you recommend?

Calculate NPV. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided.)

Explanation / Answer

XYZ is recommended as it has NPV which is higher and positive

Cost of capital = 12.000% Year 0 1 2 3 4 Cash flow stream -240000 78000 78000 78000 78000 Discounting factor 1 1.12 1.2544 1.404928 1.573519 Discounted cash flows project -240000 69642.9 62181.12 55518.86 49570.41 NPV = Sum of discounted cash flows NPV ABC = -3086.750963 Discounting factor = (1 + discount rate)^(CORRESPONDING PERIOD IN YEARS) Discounted Cashflow= Cash flow stream/discounting factor

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