Question

Prevent Value Project QUESTION: A company is considering two alternative projects. Both projects require the same cash outlay. Cash Flow Year Project A Project Z $ 30,000 $ 44,000 $ 70,000 $ 144,000 $ 35,000 $ 44,000 $ 65,000 $144,000 Cash Outlay $ Immediately 11,000 $ 11,000 Cost of Borrowing Money 8% Required: Using Excel, prepare a worksheet evaluating the two projects. Determine which project is better: a) at the end of year 1 b) at the end of year 2 c) at the end of year 3

Answer 1

Answer to part (a)
Since NPV of Project Z is higher than Project A at the end of year 1, hence Project Z is better
Answer to part (b)
Since NPV of Project Z is higher than Project A at the end of year 2, hence Project Z is better
Answer to part (c )
Since NPV of Project Z is higher than Project A at the end of year 3, hence Project Z is better
Calculation of NPV of project A
Discount rate	8%
Year	0	1	2	3
Cash Flow	$ -11,000.00	$ 30,000.00	$ 44,000.00	$    70,000.00
Present Value	$ -11,000.00	$ 27,777.78	$ 37,722.91	$    55,568.26
NPV		$ 16,777.78	$ 54,500.69	$ 1,10,068.94
Calculation of NPV of project Z
Discount rate	8%
Year	0	1	2	3
Cash Flow	$ -11,000.00	$ 35,000.00	$ 44,000.00	$    65,000.00
Present Value	$ -11,000.00	$ 32,407.41	$ 37,722.91	$    51,599.10
NPV		$ 21,407.41	$ 59,130.32	$ 1,10,729.41