Question

2071 - Extra Credit Assignment . Boca Raton Company is deciding between two projects. Each project requires an initial investment of $350,000. The projected net cash flows for the two projects are listed below. The revenue is to be received at the end of each year. Boca Raton requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity factors for 10 % are presented below. Use net present value to determine which project should be pursued and explain why. (Hint: PV of annuity factors are used when expect to receive a series of equal cash flows) Present Value of an Annuity of 1 at 10% Project B Cash Flows $160,000 $175,000 $175,000 Present Value Project A Cash Flows Periods of 1 at 10% $50,000 1 0.9091 0.8264 0.7513 0.9091 2 $200,000 1.7355 $250,000 3 2.4869

Answer 1

Answer- Net present value - Project A= $48560.

Project B =$71554.

Explanation-

Calculation of Project A Net Present Value
	Net Cash Flows $ (a)	Present Value of 1 at 10% (b)	Present Value of cash flows (c=a*b) $
Year 1	50000	0.9091	45455
Year 2	200000	0.8264	165280
Year 3	250000	0.7513	187825
Totals
Total present value of cash inflow (a)			398560
Total cash outflow (b)	350000	1	350000
Net Present Value $ (c=a-b)			48560
Calculation of Project B Net Present Value
	Net Cash Flows $ (a)	Present Value of 1 at 10% (b)	Present Value of cash flows (c=a*b) $
Year 1	160000	0.9091	145456
Year 2	175000	0.8264	144620
Year 3	175000	0.7513	131478
Totals
Total present value of cash inflow (a)			421554
Total cash outflow (b)	350000	1	350000
Net Present Value $ (c=a-b)			71554

The Project B should be pursued due to higher net present value compare with the Project A.