Solution
Phoenix Company
Determination of the profitable project at 12% rate of return:
Project C1 |
||||||
Initial Investment |
$222,000 |
|||||
Chart Values are Based on: |
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Year |
Cash Inflow |
X |
PV Factor |
= |
Present Value |
|
1 |
$10,000 |
0.8929 |
= |
$8,929 |
||
2 |
$106,000 |
0.7972 |
$84,503 |
|||
3 |
$166,000 |
0.7118 |
$118,159 |
|||
$211,591 |
||||||
Present value of cash inflows |
$211,591 |
|||||
Present value of cash outflows |
($222,000) |
|||||
Net Present Value |
($10,409) |
|||||
C2 |
||||||
Initial Investment |
$222,000 |
|||||
Chart Values are Based on: |
||||||
Year |
Cash Inflow |
x |
PV Factor |
= |
Present Value |
|
1 |
$94,000 |
0.8929 |
= |
$83,933 |
||
2 |
$94,000 |
0.7972 |
$74,937 |
|||
3 |
$94,000 |
0.7118 |
$66,909 |
|||
$225,778 |
||||||
Present value of cash inflows |
$225,779 |
|||||
Present value of cash outflows |
($222,000) |
|||||
Net Present Value |
$3,778 |
|||||
Project C 3 |
||||||
Initial Investment |
$222,000 |
|||||
Chart Values are Based on: |
||||||
Year |
Cash Inflow |
X |
PV Factor |
= |
Present Value |
|
1 |
$178,000 |
0.8929 |
= |
$158,936 |
||
2 |
$58,000 |
0.7972 |
$46,237 |
|||
3 |
$46,000 |
0.7118 |
$32,743 |
|||
$237,916 |
||||||
Present value of cash inflows |
$237,916 |
|||||
Present value of cash outflows |
($222,000) |
|||||
Net Present Value |
$15,916 |
|||||
Note:
For the first project the NPV is negative, the second project NPV is marginally higher and the last project C3, the NPV = $15916.
Hence, project C3 should be accepted
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