Year A B 0 -400,000 -600,000 1 55,000 300,000 2 55,000 300,000 3 55,000 50,000 4

ID: 2740348 • Letter: Y

Question

Year A B

0 -400,000 -600,000

1 55,000 300,000

2 55,000 300,000

3 55,000 50,000

4 225,000 50,000

5 225,000 50,000

Instead of $50,000 in years 3, 4 and 5, what equal payments in years 3, 4 and 5 will make the NPV of project B equal to the NPV of project A

Let us first calculat the npv of the project A at 10% discount rate

55000

The NPV is -400,000 + 55000/1.1 + 55000/1.1^2 + 55000/1.1^3 + 225000/1.1^4 +225000/1.1^5

= 27420.17

Now the nov orignally of project B is

=21,294.21

Now we have to increase it to 27420.17

Increase in price =6125.95

Now let us say increase is x

x/1.1^3 + x/1.1^4 + x/1.1^5 = 6125.95

= 6125.95/2.05 =2980.64

therefore last three year cashflows should be 52980.64

-400,000

55000

225000 225000

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