Question

Consider two mutually exclusive projects with the following cash flows: Project A is a 6 year project with initial (time 0) cash outflow of 40,000 and time 1 through 6 cash inflows of 8000,14000,13000,12000,11000,and 10000 respectively. Project B is a 3 year project with initial (time 0) cash outflow of 20,000 and time 1 through 3 cash inflows of 7000,13000, and 12000 respectively. Assuming a 11.5% cost of capital compute the NPV for project A.

a 7,165.11

b 5,391.49

c 12,000

d 28,000

Answer 1

NPV = -initial investment + PV of future cash flows

Present value = Future value/(1+i)^n

i = interest rate per period

=>

NPV = -40000 + 8000/1.115 + 14000/1.115^2 + 13000/1.115^3 + 12000/1.115^4 + 11000/1.115^5 + 10000/1.115^6

= 7165.11

choose a)