Question

(Mutually exclusive projects and NPV) You have been assigned the task of evaluating two mutually exclusive projects with the following projected cash flows: Year Project A Project B Cash Flow Cash Flow $(102,000) $(102,000) 40,000 40.000 40.000 40,000 0 40,000 215,000 If the appropriate discount rate on these projects is 9 percent, which would be chosen and why? The NPV of Project Ass (Round to the nearest cont.)

Answer 1

Net Present Value (NPV) of PROJECT-A

Period	Annual Cash Flow ($)	Present Value factor at 9.00%	Present Value of Cash Flow ($)
1	40,000	0.9174312	36,697.25
2	40,000	0.8416800	33,667.20
3	40,000	0.7721835	30,887.34
4	40,000	0.7084252	28,337.01
5	40,000	0.6499314	25,997.26
TOTAL			1,55,586.05

Net Present Value (NPV) of PROJECT-A = Present Value of annual cash inflows – Initial Investment

= $155,586.05 - $102,000

= $53,586.05

Net Present Value (NPV) of PROJECT-B

Period	Annual Cash Flow ($)	Present Value factor at 9.00%	Present Value of Cash Flow ($)
1	0	0.9174312	0
2	0	0.8416800	0
3	0	0.7721835	0
4	0	0.7084252	0
5	2,15,000	0.6499314	1,39,735.25
TOTAL			1,39,735.25

Net Present Value (NPV) of PROJECT-B = Present Value of annual cash inflows – Initial Investment

= $139,735.25 - $102,000

= $37,735.25

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.