Question

Charps-in-the-Bag Inc is considering two projects Project A will cost $1,098,000 and yield annual project cash flows of $491,000 over a year lifespan. Proiect will cost $359.000 and yield project cash flows of $128,000 each of the first 4 years of its lifespan and $43,000 in the last (5th year. If leadership requires a 15% return, which project would you select based on NPV only? Reject both projects Accept project Bits NPV is $196,000.00 Accept project A S NPV is $23.063 53 Accept project 8; its NPV is $27.815.83 Accept project Aits NPV is $375,000.00

Answer 1

The NPV of the project is computed as shown below:

= Initial investment + Present value of future cash flows

Present value of future cash flows is computed as follows:

= Future value / (1 + r)ⁿ

NPV of project A is computed as follows:

= - $ 1,098,000 + $ 491,000 / 1.15 + $ 491,000 / 1.15² + $ 491,000 / 1.15³

= $ 23,063.53 Approximately

NPV of project B is computed as follows:

= - $ 359,000 + $ 128,000 / 1.15 + $ 128,000 / 1.15² + $ 128,000 / 1.15³ + $ 128,000 / 1.15⁴ + $ 43,000 / 1.15⁵

= $ 27,815.83 Approximately

Hence the correct answer is option of Accept project B, its NPV is $ 27,815.83.

Feel free to ask in case of any query relating to this question

Answer 2

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Answer 3

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