Question

The following are the cash flows of two independent projects:

Year Project A Project B

0 (210) (210)

1 90 110

2 90 110

3 90 110

4 90   

If the opportunity cost of capital is 12%, calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. Which of these projects is worth pursuing?

Project A

Project B

Both

Neither

Answer 1

Solution :

a. The NPV of Project A = $ 63.36

The NPV of Project B = $ 54.20

b. In case of Independent projects, the projects which have a NPV greater than zero can be pursued.

Since the NPV of both the projects is greater than zero, both the projects are worth pursuing.

The solution is Option 3 = Both

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

? 02.11.2019 Microsoft Excel FILE НОМE INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW А В C D E F G Н К L м N 1 Statement showing calculation of Net Present value of Project A Cash flows Statement showing calculation of Net Present value of Project B Year PV Factor @Discounted Cash Year PV Factor@ Discounted Cash Flows (4)-(1) (3) 1.0000 $ SI.No. Particulars Cash flows SI.No. Particulars (2) 12% Flows (4)-(1) (3) 1,0000 $ (1) (1) (2) 12% (3) (3) 1 Cash outflow Year 0 1 Cash outflow Year 0 $ 210.0000 210.0000 4 210.00 0 210.00 0 Total of Cash Outflows (A) $ 210.0000 Total of Cash Outflows (A) 5 2 2 210.0000 0.8929 $ 0.7972 $ 0.7118 $ 0.6355 $ 0.8929 $ 0.7972 $ 0.7118 $ $ 3 Cash Inflow Year 1 3 Cash Inflow Year 1 6 90.00 1 80.3571 110.00 1 98.2143 4 Cash Inflow Year 2 5 Cash Inflow Year 3 4 Cash Inflow Year 2 $ 71.7474 7 90.00 2 110.00 2 87.6913 5 Cash Inflow Year 3 6 Cash Inflow Year 4 $ $ 31 8 90.00 3 64.0602 110.00 78.2958 61 57.1966 Total of Cash Discounted Inflows (B) 264.2014 9 90.00 Net Present Value (B)- (A) $ $ Total of Cash Discounted Inflows (B) 10 7 273.3614 7 54.2014 Net Present Value = (B) - (A) Net Present Value (Rounded off to two decimal places) Net Present Value ( Rounded off to two decimal places) 11 8 63.3614 8 54,20 $ 12. 9 63.36 13 14 15