Richard Inc. is currently evaluating three projects that are independent. All th

Question

Richard Inc. is currently evaluating three projects that are independent. All three projects cost the same at $500,000. Expected cash flow streams are shown in the following table. Which projects would be accepted at a  discount rate of 14.8 percent? Use NPV method.        Project 1             Project 2       Project  3             1                                                                       
0 0 245,125        2 $125,000 0 212,336         3 150,000 500,000 112,500         4 375,000 500,000 74,000 Richard Inc. is currently evaluating three projects that are independent. All three projects cost the same at $500,000. Expected cash flow streams are shown in the following table. Which projects would be accepted at a  discount rate of 14.8 percent? Use NPV method.        Project 1             Project 2       Project  3             1                                                                       
0 0 245,125        2 $125,000 0 212,336         3 150,000 500,000 112,500         4 375,000 500,000 74,000

Explanation / Answer

Calculation of Net present value of 3 projects to know which project should be acepted,
here we have a formula for Net present value = present value of Cash inflows - initial investment.

here, we know the initial investment = $500,000

Let us start calculating the net present value for each of the 3 projects.

Project -1, NPV:

Therefore, Net present value = present value of Cash inflows - initial investment.

= 432,875 - 500,000 = -67,125

By selecting this project their will be a Negative cash flow of 67,125,
Therefore this project should be rejected

Project -2, NPV:

Therefore, Net present value = present value of Cash inflows - initial investment.

= 633,500 - 500,000 =133,500

By selecting this project their will be a positive cash flow of 133,500
Therefore this project should be Acepted

Project -3, NPV:

Therefore, Net present value = present value of Cash inflows - initial investment.

= 498,006.9 - 500,000 = -1,993.1

By selecting this project their will be a Negative cash flow of 1,933.1
Therefore this project 1 should be rejected

Conclution: Based on the above 3 calculations project 2 is the best option to accept.

Year Cash flows Discounting factor @14.8% = 1 / (1+r)n Present values
= cash flows * discounting factor 1 0 1 / (1+14.8%)1 = 0.877 0 2 125,000 1 / (1+14.8%)2 = 0.769 109,625 3 150,000 1 / (1+14.8%)3 = 0.675 101,250 4 375,000 1 / (1+14.8%)4 = 0.592 222,000 Present value of cash flows 432,875

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