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Dwight Donovan, the president of Vernon Enterprises, is considering two investment opportunities. Because of limited resource
Dwight Donovan, the president of Vernon Enterprises, is considering two investment opportunities. Because of limited resource
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Answer #1

Answer:

Calculation of Net Present Value of both projects:

Project A

Particulars

Amount

Projected Cash inflows(a)

51,745

Discounting Factor(b)

6%

No of years(c)

3

PV Annuity Factor(d)

2.6730

PV of Cash Inflows {e=(a*d)}

138,314.39

Cash Outflow (f)

109,000

NPV (e-f)

29,314.39

Project B

Particulars

Amount

Projected Cash inflows(a)

17,229

Discounting Factor(b)

6%

No of years(c)

3

PV Annuity Factor(d)

2.6730

PV of Cash Inflows {e=(a*d)}

46,053.12

Cash Outflow (f)

40,000

NPV (e-f)

6,053.12

Conclusion: Since NPV in Project A is higher Project A should be chosen.

2.)

IRR
Project A    Project B
Cash inflows 51,745 17,229
Annuity PVF at 20% for 3 years 2.1065
Annuity PVf at 14% fr 3 yrs 2.3216
Present value of inflows 109,000.84 39,998.85
Less: Investment 109,000 40,000
NPV -0.84 -1.15
IRR 20% 14%

Conclusion: Based on IRR, Project A should be chosen because it has higher IRR.

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