b-2. Which of the two projects should be chosen based on the net present value m

Question

b-2. Which of the two projects should be chosen based on the net present value method? Proj ect B c. Should a firm normally have more confidence in the payback method or the net present value m Net present value is ten the Preferred investment selec tion metnoc. 6. The Hudson Corporation makes an investment of $33,320 that provides the following cash flow $16,000 16,000 10,000 a. What is the net present value at a discount rate of 8 percent? b. What is the internal rate of returm? c. Would you make the same decision under both parts a and b?

Explanation / Answer

Year Project Cash Flows (i) DF@ 8% (ii) PV of Project A ( (i) * (ii) ) DF@ 20% (ii) PV of Project A ( (i) * (ii) ) 0 -33320 1                    (33,320.00) 1     (33,320.00) 1 16000 0.926                     14,814.81 0.833      13,333.33 2 16000 0.857                     13,717.42 0.694      11,111.11 3 10000 0.794                       7,938.32 0.579        5,787.04 CASH INFLOW                       3,150.56 NPV       (3,088.52) a) NET PRESENT VALUE = 3,150.56 b) IRR = Ra + NPVa / (NPVa - NPVb) * (Rb - Ra) 8% +3150.56 / (3150.56 + 3088.52)*(20%-8%) 13.57% c) Yes, since in 1st option NPV is positive and in 2nd option IRR is more than NPV rate.

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