Question

Net Present Value-Unequal Lives Project 1 requires an original investment of $68,800. The project will yield cash flows of $14,000 per year for eight years. Project 2 has a calculated net present value of $17,400 over a six-year life. Project 1 could be sold at the end of six years for a price of $52,000. Use the Present Value of $1 at Compound Interest and the Present Value of an Annuity of $1 at Compound Interest tables shown below. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0 .943 0.9090.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0.233 0.592 0.424 0.361 0.284 0.194 10 0 .558 0.386 0.322 0.247 0.162 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.9090.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528

Answer 1

a) Net present value = Present value of cash inflow-Present value of cash outflow

= (14000*4.111+52000*.507)-68800

Net present value = 15118

b) Project 2 Which has 17400 Net present value is higher