Question

1. Boca Raton Company is deciding between two projects. Each project requires an initial investment of $350,000. The projected net cash flows for the two projects are listed below. The revenue is to be received at the end of each year. Boca Raton requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity factors for 10% are presented below. Use net present value to determine which project should be pursued and explain why. (Hint: PV of annuity factors are used when expect to receive a series of equal cash flows)

	Project A	Project B	Present Value	Present Value of an
Periods	Cash Flows	Cash Flows	of 1 at 10%	Annuity of 1 at 10%
1	$50,000	$160,000	0.9091	0.9091
2	$200,000	$175,000	0.8264	1.7355
3	$250,000	$175,000	0.7513	2.4869

Answer 1

Present value of project A = 50000*0.9091+200000*0.8264+250000*0.7513 - 350000

= $398560

Present value of project B = 160000*0.9091+175000*0.8264+175000*0.7513-350000

= $421553.5

Project B should be pursued because it has higher NPV.