Zayas, LLC, has identified the following two mutually exclusive projects: Year C

Question

Zayas, LLC, has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 $ 60,000 $ 60,000 1 36,000 23,000 2 30,000 27,000 3 21,000 32,000 4 14,000 25,000 Assume the required return is 11 percent. What is the NPV for each of these projects? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Net present value Project A $ Project B $ Which project will you choose if you apply the NPV decision rule? c. Over what range of discount rates would you choose Project A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Project A % Over what range of discount rates would you choose Project B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Project B % At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Discount rate %

Explanation / Answer

Ans : - 1 Years Years Years Years Years Years Years Years Years Years 0 1 2 3 4 0 1 2 3 4 Cash flow from the project A $60,000.00 $36,000.00 $30,000.00 $21,000.00 $14,000.00 Cash flow from Project B $60,000.00 $23,000.00 $27,000.00 $32,000.00 $25,000.00 Discounting @ 11% 1 0.900900901 0.811622433 0.73119138 0.65873097 Discounting @ 11% 1 0.9009009 0.8116224 0.7311914 0.658731 Present value of cash @ 11% $60,000.00 $32,432.43 $24,348.67 $15,355.02 $9,222.23 Present value of cash @ 11% $60,000.00 $20,720.72 $21,913.81 $23,398.12 $16,468.27 1.11 Present value to cash inflow $81,358.36 Present value to cash inflow $82,500.92 Present value of cash outflow $60,000.00 Present value of cash outflow $60,000.00 Net present value $21,358.36 Net present value $22,500.92 Ans :- 2 As the net present value of Project B is higher, Project B would be chosen Ans 3 : - At discount rate of 14.8 - 15% and higher Project A would be prefred over project B Ans 4 : - At discount rate of less than 14.8% and lesser rates Project B would be prefred over Project A Ans 5: - 14.8 % is the discount rate at which choice in between both the projects would be indifferent Note : - It is suggested to use speadsheet to solve this question

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