Two projects have equal net present values when calculated using a 6% annual eff

Question

Two projects have equal net present values when calculated using a 6% annual effective interest rate. Project I requires an investment of $20,000 immediately and will return $8,000 at the end of one year and $15,000 at the end of two years. Project 2 requires investments of $10,000 immediately and $X in two years. It will return $3,000 at the end of one year and $14,000 at the end of three years. Find the difference in the net present values of the two projects if they are calculated using a 5% annual effective interest rate.

Explanation / Answer

Formula for NPV: =I5+NPV(0.06,I6:I8)
Where in each case I5 is the initial cash flow and I6 to I8 are subsequent cash flows

Present value of X is to be calculated as:
897.12=4584.86+X
X=-3,687.74

Value of X at year 2= -3687.74*(1.06^2)=$-4,143.55

Formula for NPV: =I5+NPV(0.05,I6:I8)
Where in each case I5 is the initial cash flow and I6 to I8 are subsequent cash flows

Year Project 1 Project 2 0 $ -20,000.00 $ -10,000.00 1 $     8,000.00 $     3,000.00 2 $   15,000.00 $ X   3    $   14,000.00 NPV $ 897.12 $ 4,584.86+PV of X

Formula for NPV: =I5+NPV(0.06,I6:I8)
Where in each case I5 is the initial cash flow and I6 to I8 are subsequent cash flows

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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