Question-15 Consider the following two mutually exclusive investment projects: n
ID: 2593381 • Letter: Q
Question
Question-15 Consider the following two mutually exclusive investment projects: n Project A 0 -$20,000 Project B -$25,000 25,500 18,000 117,500 2 17,500 3 15,000 On the basis of the NPW criterion, assume an infinite planning horizon with project repeatability (the same costs and benefits). In order to determine which project to choose, we need to compare the present worth of these projects. In this study, what is the Project B's present worth using i-12%? Answer: a) Between $28,300 and $28,600 b) Between $27,300 and $27,600 c) Between $26,300 and $26,600 d) Between $25,000 and $55,600 e) Between $29,000 and $29,600Explanation / Answer
Information given:
i = 12%
Required period = infinite.
Thus, the analysis period = least common multiple required periods
=3*2 = 6 years
Let, us find the Present worth of Project A:
PW (12%) for period= -$20,000 + $17,500(P/F, 12%, 1)+ $17,000(P/F, 12%, 2) + $15,000(P/F, 12%, 3)
= 20,252.60
Year
Cash flows
discounting factor at 12%
PV of cash flows
-
(20,000)
1
-20000
1
17,500
0.892857
15625
2
17,500
0.797194
13950.89
3
15,000
0.71178
10676.7
PW
20252.6
PW (12%) for total= $20,252.60* [1 + (P/F, 12%, 3)]= $34,668
Now, let us calculate for projectB:
PW (12%) for period = -$25,000 + $25,500(P/F, 12%, 1)+ $18,000(P/F, 12%, 2)
=$12,117.30
Year
Cash flows
discounting factor at 12%
PV of cash flows
-
(25,000)
1
-25000
1
25,500
0.892857
22767.86
2
18,000
0.797194
14349.49
3
-
0.71178
0
4
-
0.635518
0
12117.35
PW (12%)total= - $12,117.30* [1 + (P/F, 12%, 2) + (P/F, 12%, 4)]
=12,117.30* 2.432712
=$29,478
The correct option is e. Between $29,000 and $29,600
Year
Cash flows
discounting factor at 12%
PV of cash flows
-
(20,000)
1
-20000
1
17,500
0.892857
15625
2
17,500
0.797194
13950.89
3
15,000
0.71178
10676.7
PW
20252.6
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