Question

Your company is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flow: Year: Project A Project B

1 $5,000,000 $20,000,000

2 10,000,000 10,000,000

3 20,000,000 6,000,000

What are the two projects’ net present values, assuming the cost of capital is 10%?

Answer 1

Calculation of net present value of Project A;
Year	Cashflow(in$)(a)	PVF@10%(b)	Present value(a*b)
0	-15000000	1.000	-15000000.00
1	5000000	0.909	4545454.55
2	10000000	0.826	8264462.81
3	20000000	0.751	15026296.02
Net Present value(in $)			12836213.37
Calculation of net present value of Project B;
Year	Cashflow(in$)(a)	PVF@10%(b)	Present value(a*b)
0	-15000000	1.000	-15000000.00
1	20000000	0.909	18181818.18
2	10000000	0.826	8264462.81
3	6000000	0.751	4507888.81
Net Present value(in $)			15954169.80