Question

12 Graded Homework Sarved 2 Exercise 12-14 Comparison of Projects Using Net Present Value (L012-2) Labeau Products, Ltd., of Perth, Australia, has $16,000 to invest. The company is trying to decide between two alternative uses fc funds as follows: Invest Invest -Book Project Project Print Tences Investment required Annual cash inflows Single cash inflow at the end of 6 years Life of the project $ 16,000 $ 16,000 $ 5,000 $ 35,000 years 6 years The company's discount rate is 15%. Click here to view Exhibit 12B-1 and Exhibit 128-2. to determine the appropriate discount factor(s) using tables. Required: 1. Compute the net present value of Project X. 2. Compute the net present value of Project Y. 3. Which project would you recommend the company accept?

Answer 1

Please find below table useful to compute desired results: -

B B | 1 Discount Rate T LES =15/100 2 Computation of NPV 3 Now 1 2 4 Project X 5 Initial Investment |-16000 6 Annual Cash Inflow 5000 5000 5000 5000 5000 5000 7 Total Cash Flow =B5+B6 =C5+C6 =D5+D6 =E5+E6 =F5+F6 =G5+G6 =H5+H6 8 Discount Factor @15%) =1/(1+B190 1=1/(1+B1) C3 =1/(1+B1) D3 1=1/(1+B1) E3 1=1/(1+B1) F3 1=1/(1+B1) G3 1=1/(1+B1) H3 9 Present Value =B7*B8 =C7*C8 =D7*D8 =E7%E8 =F7*F8 =G7*G8 =H7*H8 10 Net Present Value =SUM(B9:H9) 11 Computation of NPV Now 1 56 13 Project Y 14 Initial Investment |-16000 15 Single Cash Inflow 35000 16 Total Cash Flow =B14+B15 =C14+C15 =D14+D15 =E14+E15 =F14+F15 =G14+G15 =H14+H15 17 Discount Factor(@15%) =1/(1+B1) 0 =1/(1+B1) C12 =1/(1+B1) D12 =1/(1+B1) E12 =1/(1+B1) F12 =1/(1+B1) G12 =1/(1+B1) H12 18 Present Value =B16*B17 =C16*C17 =D16*D17 =E16*E17 =F16*F17 =G16*G17 =H16*H17 19 Net Present Value =SUM(B18:H18) 12 20 Project X has a positive NPV and hence it should be accepted

for second question: -

к M N 1 2.. Rate of Return =22/100 Computation of NPV 1 Now Purchase of equipment -500000 Working Capital Investment -180000 Annual Net cash Receipts Road Construction Working Capital released Salvage Value of equipment Total Cash flows =SUM(K4:K9) Discount Factor(22%) =1/(1+$K$10 Present Value =K10*K11 Net Present Value =SUM(K12:012) 195000 195000 195000 195000 -56000 =-K5 81000 =SUM(L4:19) =SUM(M4:M9) =SUM(N4:N9) =SUM(04:09) =1/(1+$K$1) L3 =1/(1+$K$1) M3 =1/(1+$K$1) N3 =1/(1+SKS1) 03 =L10*L11 =M10*M11 =N10*N11 =010*011 b. NO, because the project has a negative NPV and hence it should not be accepted

End results would be as follows: -

B C D E F G 15% Computation of NPV 1 2 Now 3 4 5 6 A 1 Discount Rate 2 3 4 Project X 5 Initial Investment 6 Annual Cash Inflow 7 Total Cash Flow 8 Discount Factor(@15%) 9 Present Value 10 Net Present Value 11 (16,000) 5,000 5,000 5,000 (16,000 5,000 5,000 5,000 10.8696 0.7561 0.6575 (16,000) 4,348 3,781 3,288 2,922.41 Computation of NPV Now 1 2 3 5,000 5,000 0.5718 2.859 5,000 5,000 0.4972 2.486 5,000 5,000 0.4323 2.162 12 4 5 6 (16,000) 13 Project Y 14 Initial Investment 15 Single Cash Inflow 16 Total Cash Flow 17 Discount Factor(@15%) 18 Present Value 19 Net Present Value 0.5718 0.4972 35,000 35,000 0.4323 15.131 (16,000) 1 0.8696 (16,000) - (868.53) 0.7561 0.6575 - L - | L 20 Project X has a positive NPV and hence it should be accepted

For Second question: -

M N O i 2... Rate of Return L 22 Computation of NPV Now 1 (500,000) (180,000) 195,000 2 3 4 195,000 Purchase of equipment Working Capital Investment Annual Net cash Receipts Road Construction Working Capital released Salvage Value of equipment Total Cash flows Discount Factor(22%) Present Value Net Present Value 195,000 195,000 (56,000) 180,000 81,000 139,000 456,000 0.5507 0.4514 76,548 205,838 (680.000)| 195,000 195,000 1 0.8197 0.6719 (680,000) 159,836 | 131,013 (106,764.52) | b. NO, because the project has a negative NPV and hence it should not be accepted