P-2. Good old XYZorp (they\'re back!) is considering two mutually exclusive proj

Question

P-2. Good old XYZorp (they're back!) is considering two mutually exclusive projects, A & B in order to expand their product line. After letting the cost accountants out of their cages, it was determined that project A's initial investment must be $42,400, while project B will cost $60,000. Project A has projected cash inflows of $25,000 per year for three years. Project B's inflows are more variable: $10,000 in year 1; $30,000 in year 2; and $40,000 in its final year. You have determined the following: the Prime is 7%, LIBOR is 6%, the firm's cost of capital is 12%. Using NPV analysis, if the NPV for project B = + $ 1,320 (yes, I ddi the computation for you!), which project do you prefer?

Explanation / Answer

Calculation of NPV of Project A Year Cash flow PVAF 12% Net cash flow 0 -42400 1 -42400 1 25000 0.8929 22321.43 2 25000 0.7972 19929.85 3 25000 0.7118 17794.51 NPV 17645.78 Calculation of NPV of project B Year Cash flow PVAF 12% Net cash flow 0 -60000 1 -60000 1 10000 0.8929 8928.571 2 30000 0.7972 23915.82 3 40000 0.7118 28471.21 NPV 1315.598 Since NPV of Project A is more then NPV of Project B so Project A should be selected

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.