Cavu Air Inc., a drone manufacturer is reviewing its annual budget. It is consid

Question

Cavu Air Inc., a drone manufacturer is reviewing its annual budget. It is considering investments in three different technologies. Consider the following cash flows of the three independent projects. Assume a discount rate of 12% Percent. The company has $20 million to invest in projects this year Required return is 12% Annual cash flows Projects Year O$(8,000,000) $(12,000,000(20,000,000) Year 1$12,000,000 $12,000,000 $19,500,000 Year 25oo 5,000,000 $27,000,000 $34,000,000 Year 3 $2.500,000 $19,000,000 $22.000,000 Based on the NPV, rank these investments. O B,A, C O A, B, C O C, A, B

Explanation / Answer

Calculating Net Present Value of A

Calculating Net Present Value of B

Calculating NPV of C

Thus we can see that project C has highest NPV followed by B and then by A.

Hence the current ranking is C,B,A

Projects A Discount Factor @12% Present Value of cash flow Year 0 -8000000 1 -8000000 Year 1 12000000 0.892857143 10714285.71 Year 2 5000000 0.797193878 3985969.388 Year 3 2500000 0.711780248 1779450.62 Net Present Value 8479705.722

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