A firm is considering two alternative projects. Project A requires an initial ex
ID: 2799949 • Letter: A
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A firm is considering two alternative projects. Project A requires an initial expenditure of $100,000 plus an expenditure of S10,000 at the end of each of the next five years. It will yield $98,000 in revenue at the end of the first year and at the end of the fifth year. Project B requires an initial expenditure of $50,000. It will yield $15,000 in net revenue at the end of each of the next five years. Both projects have a life of five years with no salvage value or disposal cost. The table below provides present value factors for the firm's discount rate of 12 percent. Calculate the net present value and profitability index of each project. Which project is preferred by each criterion? PeriodPresent value of S Present value of an annuity of S1 0.8929 0.7972 0.7118 0.6355 0.5674 0.8929 1.6901 2.4018 3.0373 3.6048 4Explanation / Answer
Project A Year Outflow Inflow Net Flow Dis Fact Dis. Cash Flow 0 -1,00,000.0 -1,00,000.0 1.0000 -1,00,000 1 -10,000.0 98,000.0 88,000.0 0.8929 78,575 2 -10,000.0 -10,000.0 0.7972 -7,972 3 -10,000.0 -10,000.0 0.7118 -7,118 4 -10,000.0 -10,000.0 0.6355 -6,355 5 -10,000.0 98,000.0 88,000.0 0.5674 49,931 NPV 7,061 PI=(NPV+Initial outflow)/initial outflow 1.07 Project B Year Outflow Inflow Net Flow Dis Fact Dis. Cash Flow 0 -50,000.0 -50,000.0 1.0000 -50,000 1 15,000.0 15,000.0 0.8929 13,394 2 15,000.0 15,000.0 0.7972 11,958 3 15,000.0 15,000.0 0.7118 10,677 4 15,000.0 15,000.0 0.6355 9,533 5 15,000.0 15,000.0 0.5674 8,511 NPV 4,072 PI=(NPV+Initial outflow)/initial outflow 1.08 Under NPV method Project A is preferable due to high NPV whereas PI Project B due to High PI
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