Question

1 PV= FV Present value of $1, PV,F Appendix B (1+i Percent Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 0.952 1 0.990 0.980 0.971 0.962 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.812 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.797 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.888 4 0.961 0.924 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.906 0.747 0.621 0.951 0.863 0.822 0.784 0.713 0.681 0.650 0.593 0.567 0.705 6 0.942 0.888 0.837 0.790 0.746 0.666 0.630 0.596 0.564 0.535 0.507 0.760 0.711 0.547 0.513 7 0.933 0.871 0.813 0.665 0.623 0.583 0.482 0.452 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.837 0.766 0.703 0.645 0.544 0.460 0.39 0.914 0.592 0.500 0.424 0.36 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 0.497 12 0.887 0.788 0.701 0.625 0.557 0.444 0.397 0.356 0.319 0.286 0.257 0.469 13 0.879 0.773 0.681 0.601 0.530 0.415 0.368 0.326 0.290 0.258 0.229 0.340 0.661 0.505 0.388 0.299 0.205 14 0.870 0.758 0.577 0.442 0.263 0.232 0.48 0.743 0.239 15 0.861 0.642 0.555 0.417 0.362 0.315 0.275 0.209 0.183 16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.436 0.371 0.270 0.231 17 0.844 0.714 0.605 0.513 0.317 0.198 0.170 0.146 O.180 18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.153 0.130 0.331 0.164 19 0.828 0.686 0.570 0.475 0.396 0.277 0.232 0.194 0.138 O.116 0.377 0.312 0.258 0.178 O.149 20 0.820 0.673 0.554 0.456 0.215 O.124 0.104 0.610 0.295 25 0.780 0.478 0.375 0.233 0.184 0.146 0.116 O.092 0.074 0.059 0.099 30 0.552 0.174 0.742 0.412 0.308 0.231 0.131 0.075 0.057 0.044 0.033 0.067 40 0.672 0.453 0.307 0.208 0.142 0.097 0.046 0.032 0.022 0.015 0.011 0.228 50 0.608 0.372 0.141 0.087 0.054 0.034 0.021 0.013 0.009 0.005 0.003
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Project E					Project H
($40,000 Investment)					($36,000 Investment)
Year	Cash Flow				Year	Cash Flow
1	$	9,000			1	$	17,000
2		14,000			2		15,000
3		20,000			3		13,000
4		22,000

a. Determine the net present value of the projects based on a zero percent discount rate.

b. Determine the net present value of the projects based on a discount rate of 11 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)

c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 11 percent?

• Project E

• Project H

• Both H and E

Answer 1

Year Project E Discount Factor Discounted Cash Cash flow @ 0% flow @ 0% (a) (b) (a) * (b) (40,000) (40,000) 9,000 9,000 14,000 14,000 20,000 20,000 22,000 22,000 Total or NPV 25,000 Discount Factor Discounted Cash @11% flow @11% (c) (a) * (c) 1.000 (40,000) 0.901 8,109 0.812 11,368 0.731 14,620 0.659 14,498 8,595 Year Project H Cash flow Discount Factor Discounted Cash @ 0% flow @ 0% (a) (b) (a) * (b) (36,000) (36,000) 17,000 17,000 15,000 15,000 13,000 13,000 Total or NPV 9,000 Discount Factor Discounted Cash @11% flow @11% (a) * (C) 1.000 (36,000) 0.901 15,317 0.812 12,180 0.731 9,503 1,000

NPV = Discounted Cash inflows - Discounted Cash outflows.

If the projects are not mutually exclusive, then both projects must be accepted since both the projects have NPV above zero.

Therefore, answer for c) Both H and E

Discount Factor:

Appendix B Present value of St. PVP PV=FV Percent Period Ö VAWN 1% 0.990 0.980 0.971 0.961 0.951 0.942 0.933 0.923 0.914 0.905 2% 0.980 0.961 0.942 0.924 0.906 0.888 0.871 0.853 0.837 0.820 3% 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 4% 0.962 0.925 0.889 0.855 0.822 0.790 0.760 5% 0.952 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.645 0.614 6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 7% 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 11% 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.731 0.703 0.676