11. Project 1 requires an original investment of $99,200. The project will yield
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Question
11. Project 1 requires an original investment of $99,200. The project will yield cash flows of $14,000 per year for 10 years. Project 2 has a calculated net present value of $27,000 over a eight-year life. Project 1 could be sold at the end of eight years for a price of $59,000.
Use the Present Value of $1 at Compound Interest and the The sum of the present values of a series of equal cash flows to be received at fixed intervals.Present Value of an Annuity of $1 at Compound Interest tables shown below.
a. Determine the net present value of Project 1 over a eight-year life with residual value, assuming a minimum rate of return of 6%. If required, round to the nearest dollar.
$
b. Which project provides the greatest net present value?
Project 1
Project 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 0.162Explanation / Answer
(a) Original investment is Project 1 = $99,200
Annual Cash flows = $14,000 , Terminal Cashflow = $59,000
So, present value of cash flows = 14,000(PVAF @ 6% for 7years) +(14,000+ 59,000)* PVF @ 6% for 8 years
= (14,000 * 5.5824) + (73,000 * 0.627)
= 78,153.60 + 45,771 = $123,924.60
NPV = Present value of Cashflows - Original Investment = 123,924.60 - 99,200 = $24,724.60
(b) As per the above solution, we find that Project 2provides the greatest net present value of $27,000 as compared to Project 1 with NPV of $24,724.60.
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