ezto mheducation.com/hm.tpx?todo postSubmissionView Labeau Products, Ltd., of Pe

Question

ezto mheducation.com/hm.tpx?todo postSubmissionView Labeau Products, Ltd., of Perth, Australia, has $11,000 to invest. The company is trying to decide between two alternative uses for the funds as follows: Invest in Invest in Project XProject Y $11,000 $11,000 Investment required Annual cash inflows Single cash inflow at the end of 6 years Life of the project 4,000 25,000 6 years6 years The company's discount rate is 15%. Click here to view Exhibit 13B-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using tables Required: a. Determine the net present values. Project X Project Y Net Present Value3 ,138 103 193 b. Which alternative would you recommend that the company accept? ProjectX

Explanation / Answer

NPV:

Project X = $4138

Project Y = -$192

Requirement b:

Since NPV of the project X is higher than that of Project Y, it is recommended to accept the project X

Requirement a: Determination of Net Present Value: Project X Project Y a Investment -11000 -11000 b Annual Cash Flows 4000 0 c PVAF(15%,6) 3.784482694 3.784482694 d PV of Annual Cash flows (b*c) 15137.93078 0 e Single Cash Inflow 0 25000 f PVIF (15%,6) 0.432327596 0.432327596 g PV of single cash flow (e*f) 0 10808.1899 h PV of Cash Inflows (d+g) 15137.93078 10808.1899 i Net Present Value (a+h) 4138 -192

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