Tremaine Company is considering two mutually exclusive long-term investment proj
ID: 2482306 • Letter: T
Question
Tremaine Company is considering two mutually exclusive long-term investment projects. Project ABC would require an investment of $240,000, have a useful life of 4 years, and annual cash flows of $78,000. Project XYZ would require an investment of $230,000, have a useful life of 5 years, and annual cash flows of $66,000. Cost of capital is 12 percent.
Calculate NPV. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided.)
PROJECT ABC
PROJECT XYZ
Tremaine Company is considering two mutually exclusive long-term investment projects. Project ABC would require an investment of $240,000, have a useful life of 4 years, and annual cash flows of $78,000. Project XYZ would require an investment of $230,000, have a useful life of 5 years, and annual cash flows of $66,000. Cost of capital is 12 percent.
Explanation / Answer
Solution:
Calculation of Net Present Value (NPV)
Net Present Value = Present Value of Cash Flow - Present Value of Cash Outlfow (Initial Investment)
Project ABC
NPV = ($78,000 x 3.0373) - $240,000
= $236,909 - $240,000
= $3,091
Project XYZ
Net Present Value = ($66,000 x 3.6048) - $230,000
= $237,917 - $230,000
= $7,917
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