Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | Discount Rate |
Alpha | -79 | 20 | 25 | 30 | 35 | 40 | 15% | ||
Beta | -80 | 25 | 25 | 25 | 25 | 25 | 25 | 25 | 16% |
Present value of Cashflow from Project Alpha | -79 | 20/(1.15)^1 = 17.3913 | 25/(1.15)^2 = 18.9036 | 30/(1.15)^3 = 19.7255 | 35/(1.15)^4 = 20.0114 | 40/(1.15)^5 = 19.8871 | |||
NPV of Project Alpha | 16.9189 = -79+17.3913+18.9036+19.7255+20.0114+19.8871 | ||||||||
Present value of Cashflow from Project Beta | -80 | 25/(1.16)^1 = 21.5517 | 25/(1.16)^2 = 18.5791 | 25/(1.16)^3 = 16.0164 | 25/(1.16)^4 = 13.8073 | 25/(1.16)^5 = 11.9028 | 25/(1.16)^6 = 10.2611 | 25/(1.16)^7 = 8.8457 | |
NPV of Project Beta | 20.9641 = -80+21.5517+18.5791+16.0164+13.8073+11.9028+10.2611+8.8457 | ||||||||
Answer : C. Invest in Project Beta NPVbeta > NPValpha > 0 | |||||||||
Year | 0 | 1 | 2 | 3 | 4 | Discount Rate | |||
A | -100 | 40 | 50 | 60 | 14% | ||||
B | -73 | 30 | 30 | 30 | 30 | 14% | |||
Present value of Cashflow from Project A | -100 | 40/(1.14)^1 = 35.0877 | 50/(1.14)^2 = 38.4734 | 60/(1.14)^3 = 40.4983 | |||||
Present value of future cashflows | 114.0594 = 35.0877+38.4734+40.4983 | ||||||||
Profitability Index = Present value of future cashflows / Initial outflow | =114.0594 / 100 - 1 | ||||||||
= 1.1405 - 1 | |||||||||
Answer : C.Profitability index for project A | = 0.14 |
Consider the following two projects: Project Year 0 Year 1 Year 2 Year 3 Year 4...
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Consider the following two projects: Project Year 0 Year 1 Year 2 Year 3 Year 4 Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow A - 100 40 50 60 N/A B -73 30 30 30 30 Discount Rate 0.1 0.1 The net present value (NPV) of project A is closest to: A. 28.5 B. 56.9 C. 25 D. 22.8
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