Virus Stopper Inc., a supplier of computer safeguard systems, uses a cost of cap
ID: 2785250 • Letter: V
Question
Virus Stopper Inc., a supplier of computer safeguard systems, uses a cost of capital of 11 percent to evaluate average-risk projects, and it adds or subtracts 1 percentage points to evaluate projects of more or less risk. Currently, two mutually exclusive projects are under consideration. Both have a cost of $ 302 and will last 4 years. Project A, a riskier-than-average project, will produce annual end of year cash flows of $ 93 . Project B, of less than average risk, will produce cash flows of $ 296 at the end of Years 3 and 4 only. To the nearest .01, list the NPV of the higher NPV project. Note, if the NPV is negative, place a - sign in front of your answer. Do not use the $ symbol.
Explanation / Answer
Project A - Riskier than average project
CF0 = -302
CF1 = 93
CF2 = 93
CF3 = 93
CF4 = 93
Discount Rate = 11% + 1% = 12%
NPV = -302 + 93/ (1.12)1 + 93/ (1.12)2 + 93/ (1.12)3 + 93/ (1.12)4
NPV = -302 + 83.04 + 74.14 + 66.20 + 59.10
NPV = -19.53
Project B - Less Riskier than average project
CF0 = -302
CF1 = 0
CF2 = 0
CF3 = 296
CF4 = 296
Discount Rate = 11% - 1% = 10%
NPV = -302 + 0/ (1.10)1 + 0/ (1.10)2 + 296/ (1.10)3 + 296/ (1.10)4
NPV = -302 + 0 + 0 + 222.39 + 202.17
NPV = 122.56
Less riskier project has higher NPV
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.