Keller Construction is considering two new investments. Project E calls for the

Question

Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
  

a. Determine the net present value of the projects based on a zero percent discount rate.
  

b. Determine the net present value of the projects based on a discount rate of 11 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)
  

  
c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 11 percent?
  

Project E Project H ($30,000 Investment) ($28,000 Investment) Year Cash Flow Year Cash Flow 1 $ 8,000 1 $ 17,000 2 11,000 2 12,000 3 12,000 3 10,000 4 15,000 Appendix B Present value of $1,PVF PV=FV Percent Period 4 Appendlx B (concluded) Percent Period 50% 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.640 0.592 0.549 0.510 0.444 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0512 0.455 0.406 0.364 0.296 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.262 0.207 0.165 0.133 0.088 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.210 0.159 0.122 0.095 0.059 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.086 0.056 0.037 0.025 0.012 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 0.035 0.020 0.011 0.006 0.002 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 0.023 0.012 0.006 0.003 0.001 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.014 0.007 0.003 0.002 0 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.012 0.005 0.002 0.001 0 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010 0.004 0.001 0.001 0 0.026 0.020 0.015 0.012 0.009 0.007 0.005 0.004 0.001 0

Explanation / Answer

Requirement (a) - Net present value of the projects based on a zero percent discount rate

Project E

Net Present Value = -$30,000 + [8,000 + 11,000 + 12,000 + 15,000]

= -$30,000 + 46,000

= $16,000  

Project H

Net Present Value = -$28,000 + [17,000 + 12,000 + 10,000]

= -$28,000 + 39,000

= $11,000

Requirement (b) - Net present value of the projects based on a discount rate of 11 percent

Project E

Year

Annual Net Cash Flows

Present Value factor at 11%

Present Value of Annual Net Cash Flows

1

8,000

0.901

7,208

2

11,000

0.812

8,932

3

12,000

0.731

8,772

4

15,000

0.659

9,885

$ 34,797

Net Present Value [NPV] = Present Value of cash Inflows – Initial Investment

= $ 34,797 – 30,000

= $4,797

Project H

Year

Annual Net Cash Flows

Present Value factor at 11%

Present Value of Annual Net Cash Flows

1

17,000

0.901

15,317

2

12,000

0.812

9,744

3

10,000

0.731

7,310

$ 32,371

Net Present Value [NPV] = Present Value of cash Inflows – Initial Investment

= $ 32,371 – 28,000

= $4,371

Requirement (c) – Decision

“Project H” Should be accepted. Since equated annual worth is high in Project H [$1,789] than Project E [$1,546]

Equated Annual Worth – Project E = $4,797 / 3.102445 = $1,546

Equated Annual Worth – Project H = $4,371 / 2.44371471 = $1,789

Year

Annual Net Cash Flows

Present Value factor at 11%

Present Value of Annual Net Cash Flows

1

8,000

0.901

7,208

2

11,000

0.812

8,932

3

12,000

0.731

8,772

4

15,000

0.659

9,885

$ 34,797

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