Net Present Value—Unequal Lives Project 1 requires an original investment of $50

ID: 2457368 • Letter: N

Question

Net Present Value—Unequal Lives

Project 1 requires an original investment of $50,900. The project will yield cash flows of $13,000 per year for five years. Project 2 has a calculated net present value of $12,200 over a three-year life. Project 1 could be sold at the end of three years for a price of $60,000.

Use the Present Value of $1 at Compound Interest and the Present Value of an Annuity of $1 at Compound Interest tables shown below.

a. Determine the net present value of Project 1 over a three-year life with residual value, assuming a minimum rate of return of 20%. If required, round to the nearest dollar.
$

b. Which project provides the greatest net present value?
SelectProject 1Project 2Item 2

Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162

Explanation / Answer

a)NPV of Project-1 over a three-year life with residual value, assuming a minimum rate of return of 20% = Present Value of Cash Inflows – Present Value of Cash Outflows

= [13000*PVIFA(20%,3) + 60,000*PVIF(20%,3)] – 50,900

=[13000*2.106 + 60,000*0.579] – 50,900

= 62,118 – 50,900

= $11,218

NPV of Project-1 = $11,218

NPV of Project-2 = $12,200

Project-2 Provides greatest NPV

So we should select Project-2