Question

Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Project E					Project H
($47,000 Investment)					($38,000 Investment)
Year	Cash Flow				Year	Cash Flow
1	$	12,000			1	$	17,000
2		17,000			2		18,000
3		20,000			3		14,000
4		27,000

a. Determine the net present value of the projects based on a zero percent discount rate.

b. Determine the net present value of the projects based on a discount rate of 11 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)

c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 11 percent?

• Project E

• Project H

• Both H and E

Answer 1

A ear WNO B Project E (47,000) 12,000 17,000 20,000 27,000 C Project H (38,000) 17,000 18,000 14,000 4 8 Discount Rate 9 NPV 0% 29,000.00 11,000.00 10 11 Discount Rate 12 NPV 13 11% 10,017.96 2,161.20 14

> C 1 Year Project E 2 0 31 42 5 3 6 4 -47000 12000 17000 20000 27000 Project H -38000 17000 18000 14000 8 Discount Rate 9 NPV =NPV($B8,B3:B6)+B2 =NPV($B8,C3:C5)+C2 10 11 Discount Rate 12 NPV 13 0.11 =NPV($B11,B3:B6)+B2 NPV($B11,C3:C5)+C2

For Part c, correct answer is "Both H & E". Both these projects are having a positive NPV, which implies that both the projects would add value to the firm and hence should be selected, given they are not mutually exclusive.