Question

1. A FBO is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows:

Year	Cash Flows (A)	Cash Flows (B)
0 1 2 3 4 5	-$11,000 3,000 3,000 3,000 3,000 3,000	-$8,000 2,500 2,500 2,500 2,500 2,500

Discount rate = 3.52%

What is the NPV of project (A)?

1. 2,539
2. 2,739
3. 3,449
4. 4,000

Answer 1

NPV of project A = Present value of cash inflows - present value of cash outflows

NPV of project A = Annuity * [1 - 1 / (1 + r)ⁿ] / r - Initial investment

NPV of project A = 3000 * [1 - 1 / (1 + 0.0352)⁵] / 0.0352 - 11,000

NPV of project A = 3000 * [1 - 0.84116] / 0.0352 - 11,000

NPV of project A = 3000 * 4.512496 - 11,000

NPV of project A = $2,359