Exercise 11-11 Comparison of Projects Using Net Present Value [LO11-2] Labeau Pr
ID: 2524368 • Letter: E
Question
Exercise 11-11 Comparison of Projects Using Net Present Value [LO11-2]
Labeau Products, Ltd., of Perth, Australia, has $12,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
Determine the net present values.
Labeau Products, Ltd., of Perth, Australia, has $12,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:
Explanation / Answer
Labeau Products Ltd
Invest in Project X –
Initial investment = $12,000
Annual cash inflows = $4,000
N = 6 years
Interest rate = 16%
NPV = -$12,000 + $4,000 (P/A, 16%, 6)
= - 12,000 + 4,000 (3.685) = $2,740
The NPV for project X is = $2,740
Project Y –
Iniital investment = $12,000
Cash inflow in year 6 = $28,000
NPV = - $12,000 + $28,000 (P/F, 16%, 6)
= - 12,000 + 28,000 (0.4104) = -12,000 + 11,491
NPV = -$509
The NPV of Project Y is negative, -$509
Explanation: Project X earns a positive net present value at 16% and hence is profitable.
Project Y earns a negative net present value at 16% and hence not profitable.
Conclusion: selection criterion for a project is positive net present value.
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