Labeau Products, Ltd., of Perth, Australia, has $14,000 to invest. The company i

Question

Labeau Products, Ltd., of Perth, Australia, has $14,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:

The company’s discount rate is 18%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Compute the net present value of Project X.

2. Compute the net present value of Project Y.

3. Which project would you recommend the company accept?

Invest in
Project X Invest in
Project Y Investment required $ 14,000 $ 14,000 Annual cash inflows $ 5,000 Single cash inflow at the end of 6 years $ 35,000 Life of the project 6 years 6 years

Explanation / Answer

Net present value = Present value of cash inflow-Present value of cash outflow

1) Net present value of project X = (5000*3.498)-14000 = 3490

2) Net present value of project Y = (35000*0.370)-14000 = -1050

3) Project X should be accepted

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