1. Quark Industries has 3 potential projects, all with an initial cost of $1,600
ID: 2700742 • Letter: 1
Question
1. Quark Industries has 3 potential projects, all with an initial cost of $1,600,000. The capital budget for the year will allow Quark to only accept one of the three projects. Given the discount rates and the future cash flow of each project, determine which project Quark should accept.
Cash Flow
Project M
Project N
Project O
Year 1
$400,000
$600,000
$900,000
Year 2
$400,000
$600,000
$700,000
Year 3
$400,000
$600,000
$500,000
Year 4
$400,000
$600,000
$300,000
Year 5
$400,000
$600,000
$100,000
Discount Rate
10%
12%
18%
Cash Flow
Project M
Project N
Project O
Year 1
$400,000
$600,000
$900,000
Year 2
$400,000
$600,000
$700,000
Year 3
$400,000
$600,000
$500,000
Year 4
$400,000
$600,000
$300,000
Year 5
$400,000
$600,000
$100,000
Discount Rate
10%
12%
18%
Explanation / Answer
Hi,
Please find the answer as follows:
Project M:
NPV = -1600000 + 400000/(1+.10)^1 + 400000/(1+.10)^2 + 400000/(1+.10)^3 + 400000/(1+.10)^4+ 400000/(1+.10)^5 = -83685.29
Project N
NPV = -1600000 + 600000/(1+.12)^1 + 600000/(1+.12)^2 + 600000/(1+.12)^3 + 600000/(1+.12)^4 + 600000/(1+.12)^5 = 562865.72
Project O
NPV = -1600000 + 900000/(1+.18)^1 + 700000/(1+.18)^2 + 500000/(1+.18)^3 + 300000/(1+.18)^4 + 100000/(1+.18)^5 = 168204
Quark Industries should accept Project O as it offers the highest NPV.
Thanks.
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