Keller Construction is considering two new investments. Project E calls for the
ID: 2749370 • 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 13 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 13 percent?
Project E Project H ($50,000 investment) ($42,000 investment) Year Cash Flow Year Cash Flow 1 $ 14,000 1 $ 23,000 2 17,000 2 17,000 3 22,000 3 13,000 4 29,000Explanation / Answer
a)Determine the net present value of the projects based on a zero percent discount rate
Project E
Net Present Value = -Initial Investment + Year1 Cash Flow/(1+r) + Year2 Cash Flow/(1+r)^2 + Year3 Cash Flow/(1+r)^3 + Year4 Cash Flow/(1+r)^4
Net Present Value = -50000 + 14000/(1+0%) + 17000/(1+0%)^2 + 22000/(1+0%)^3 + 29000/(1+0%)^4
Net Present Value = 32000
Project F
Net Present Value = -Initial Investment + Year1 Cash Flow/(1+r) + Year2 Cash Flow/(1+r)^2 + Year3 Cash Flow/(1+r)^3 + Year4 Cash Flow/(1+r)^4
Net Present Value = -50000 + 23000/(1+0%) + 17000/(1+0%)^2 + 13000/(1+0%)^3
Net Present Value = 3000
Determine the net present value of the projects based on a discount rate of 13 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.
Project E
Net Present Value = -Initial Investment + Year1 Cash Flow/(1+r) + Year2 Cash Flow/(1+r)^2 + Year3 Cash Flow/(1+r)^3 + Year4 Cash Flow/(1+r)^4
Net Present Value = -50000 + 14000/(1+13%) + 17000/(1+13%)^2 + 22000/(1+13%)^3 + 29000/(1+13%)^4
Net Present Value = 8736.22
Project F
Net Present Value = -Initial Investment + Year1 Cash Flow/(1+r) + Year2 Cash Flow/(1+r)^2 + Year3 Cash Flow/(1+r)^3 + Year4 Cash Flow/(1+r)^4
Net Present Value = -50000 + 23000/(1+13%) + 17000/(1+13%)^2 + 13000/(1+13%)^3
Net Present Value = -7322.87
C) If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 13 percent?
Project E
Note : Since Project E has positive NPV where as Project F has negative NPV
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