Question

Net Present Value-Unequal Lives Project 1 requires an original investment of $76,500. The project will yield cash flows of $11,000 per year for nine years. Project 2 has a calculated net present value of $16,000 over a seven-year life. Project 1 could be sold at the end of seven years for a price of $48,000. Use the Present Value of $1 at Compound Interest and the Present Value of an Annuity of $1 at Compound Interest tables shown below. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 0.592 0.424 0.361 0.284 0.194 10 0.558 0.322 0.386 0.247 0.162 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 15% 12% 20% 0.943 1 0.909 0.893 0.870 0.833 1.736 1.626 2 1.833 1.690 1.528 3 2.283 2.106 2.673 2.487 2.402 2.855 4 3.465 3.170 3.037 2.589 3.352 2.991 5 4.212 3.791 3.605 3.326 6 4.917 4.355 4.111 3.784 4.160 7 5.582 4.868 4.564 3.605 3.837 5.ב 4.968 4.487 6.210 6.802 5.759 5.328 4.772 4.031 9 5.019 4.192 10 7.360 5.650 6.145

Answer 1

0.943 9790 a.Computation of net Present value of Project 1= Present value of Inflows(Working Note)-Present value of outflows = 106741-76500 Working Note = 30241 Computation of present value of cash flows Present value annuity Year Cash flow factor@6% Present Value A*B 11000 10377 11000 0.890 11000 0.840 9236 11000 8713 11000 0.747 8220 0.705 7755 11000 0.665 7316 48000 0.665 31923 11000 0.627 6902 11000 0.592 6511 Total Present Value Inflow 106741 Note: Seventh year sale value of 48000$ Nmin 0.792 11000 00

b. Project 1 will provide highest net present value compare to project 2 i,e 30241$ >16000$