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 1 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

Year Project 1 PV Factor at 6% Project 2 0 -20000 1 -10000 1 8000 0.943396226 3000 2 15000 0.88999644 x 3 0.839619283 14000 NPV $                                897.12 = $ 4,584.86 - 0.89X X= 4584.86-897.12 / 0.89 X = 4143.53 Now recompute NPV using 5% rate Year Project 1 PV Factor at 6% Project 2 Difference 0 -20000 1 -10000 1 8000 0.952380952 3000 2 15000 0.907029478 -4143.53 3 0.863837599 14000 NPV $                             1,224.49 = $ 1,192.57 $       31.92

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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