Caledonia is considering two additional mutually exclusive projects. The cash fl

Question

Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:

Year            Project A                Project B
0                ($100,000)            ($100,000)
1                 32,000                       0
2                 32,000                       0
3                 32,000                       0
4                 32,000                       0
5                 32,000                  $200,000
The required rate of return on these projects is 11 percent

What is each project’s net present value? ( Please show detail work including the formula)

Explanation / Answer

K=11%

NPV is found by NPV = CF0 +CF1/(1+k) + CF2/(1+K)^2 + CF3/(1+K)^3 + CF4/(1+K)^4+ CF5/(1+K)^5
For Project A
NPVa = -100,000+ 32000/(1+11%)^1 + 32000/(1+11%)^2+ 32000/(1+11%)^3+ 32000/(1+11%)^4+ 32000/(1+11%)^5 = $18268.70

NPVb = -100,000+0+0+0+0+200,000/(1+11%)^5 = $18690.27

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