Exercise 11-11 Comparison of Projects Using Net Present Value Labeau Products, L

Question

Exercise 11-11 Comparison of Projects Using Net Present Value

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:

http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-1.JPG Exhibit 11B-1

http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-2.JPG Exhibit 11B-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:

http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-1.JPG Exhibit 11B-1

http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-2.JPG Exhibit 11B-2

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 Invest in nvest in Project XProjectY $12,000 12,000 Investment required Annual cash inflows Single cash inflow at the end of 6 years Life of the project $ 5,000 $30,000 6 years 6 years The company's discount rate is 18% Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables Required a. Determine the net present values Project X Project Y Net Present Value b. Which alternative would you recommend that the company accept? O Project X ProjectY

Explanation / Answer

Answer a

Computation of NPV

Less : Annual Cash Inflows : $5,000 * PVIFA18%,6 years =

$5,000 * 3.4976

Less : Single Cash Inflows : $30,000 * PVIF18%,6th year =

$30,000 * 0.3704

Answer b

The company should accept Project X

Explanation : Project X ' NPV is higher and better than Project Y NPV

Note : The discout factor values's URL paseted here is showing an error . Thus it might happen that question used 2 decimal place or 3 decimal place discount value . Accordingly the final answer in requirement a may slightly differ but overall the answer will remains the same

Particulars Project X Project Y Initial Investments : $12,000 * 1 $12,000 $12,000

Less : Annual Cash Inflows : $5,000 * PVIFA18%,6 years =

$5,000 * 3.4976

$17,488 -

Less : Single Cash Inflows : $30,000 * PVIF18%,6th year =

$30,000 * 0.3704

- 11,112 NPV 5,488 (888)

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