Keller Construction is considering two new investments. Project E calls for the
ID: 2739006 • Letter: K
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.
Determine the net present value of the projects based on a zero percent discount rate.
Determine the net present value of the projects based on a discount rate of 9 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)
If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 9 percent?
Project E Project H ($32,000 investment) ($27,000 investment) Year Cash Flow Year Cash Flow 1 $ 10,000 1 $ 15,000 2 13,000 2 13,000 3 14,000 3 11,000 4 16,000Explanation / Answer
a.
Year
Present value factor @ 0%
Project E
Project H
Cash Flow
Present value of cash flow
Cash Flow
Present value of cash flow
0
1
-$ 32,000.00
-$ 32,000.00
-$ 27,000.00
-$ 27,000.00
1
1
$ 10,000.00
$ 10,000.00
$ 15,000.00
$ 15,000.00
2
1
$ 13,000.00
$ 13,000.00
$ 13,000.00
$ 13,000.00
3
1
$ 14,000.00
$ 14,000.00
$ 11,000.00
$ 11,000.00
4
1
$ 16,000.00
$ 16,000.00
$ 0.00
$ 0.00
$21,000.00
$12,000.00
Net present value of Project E = $21,000
Net present value of Project H = $12,000
b.
Year
Present value factor @ 9%
Project E
Project H
Cash Flow
Present value of cash flow
Cash Flow
Present value of cash flow
0
1.0000
-$ 32,000.00
-$ 32,000.00
-$ 27,000.00
-$ 27,000.00
1
0.8403
$ 10,000.00
$ 8,403.36
$ 15,000.00
$ 12,605.04
2
0.7062
$ 13,000.00
$ 9,180.14
$ 13,000.00
$ 9,180.14
3
0.5934
$ 14,000.00
$ 8,307.82
$ 11,000.00
$ 6,527.57
4
0.4987
$ 16,000.00
$ 7,978.70
$ 0.00
$ 0.00
$ 1,870.03
$ 1,312.76
Net present value of Project E = $1,870.03
Net present value of Project H = $1,312.76
c.
Both Project H and Project E can be accepted as both have positive net present value
Year
Present value factor @ 0%
Project E
Project H
Cash Flow
Present value of cash flow
Cash Flow
Present value of cash flow
0
1
-$ 32,000.00
-$ 32,000.00
-$ 27,000.00
-$ 27,000.00
1
1
$ 10,000.00
$ 10,000.00
$ 15,000.00
$ 15,000.00
2
1
$ 13,000.00
$ 13,000.00
$ 13,000.00
$ 13,000.00
3
1
$ 14,000.00
$ 14,000.00
$ 11,000.00
$ 11,000.00
4
1
$ 16,000.00
$ 16,000.00
$ 0.00
$ 0.00
$21,000.00
$12,000.00
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