Your boss has requested that you analyze two projects for him and pick the one y

Question

Your boss has requested that you analyze two projects for him and pick the one you would recommend for investment. Both projects have the same risk because they are in the same business, and their cash flows are: Project A (Year 0: -$100,000; Year 1: $30,000; Year 2: $40,000; Year 3: $50,000; Year 4: $100,410); Project B (Year 0: -$100,000; Year 1: $0; Year 2: $10,000; Year 3: $10,000; Year 4 $225,500). Which project would you recommend?

a)Project A.

b)Either one.

c)Project B.

d)Do not have enough information to make a decision.

Explanation / Answer

Calculation of NPV of projects

Net present value of Project A=94712-100000 i.e- 5288

Net present value of Project B=77273-100000 i.e -22727

Since the NPV of both the projects is negative it is advicable to not accept any project

Particulars Year Cash Flow Project A Cash Flow Project B PVF @ 35% PV Project A PV Project B Cash Outfow at year 0 0 100000 100000 1 100000 100000 Present value of cash outflows 100000 100000 Cash inflow year 1 1 30000 0 0.7407 22221 0 Cash inflow year 2 2 40000 10000 0.5487 21948 5487 Cash inflow year 3 3 50000 10000 0.4064 20320 4064 Cash inflow year 4 4 100410 224990 0.3010 30223 67722 Present value of cash inflows 94712 77273

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