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Homework Answers
(a) Formula for calculating present value PV = Future value * [1+(1+r)n]
For project 1: present value of all future income PV1 = 10,000 * (1+(1+0.09)1] + 50,000 * (1+(1+0.09)2] + 100,000 * (1+(1+0.09)3] + 135,000 * (1+(1+0.09)4]
= 9174.31 + 42084 + 77218.35 + 95637.4
= 224,114.06
For project 2 : present value of all future income PV 2 = 15,000 * (1+(1+0.13)1] + 55,000 * (1+(1+0.13)2] + 115,000 * (1+(1+0.13)3] + 150,000 * (1+(1+0.13)4]
= 13274.34 + 43073.07 + 79700.77 + 95064.40
= 23,112.58
(b) Though interest rate is higher in project 2, the net present value of income is higher in this project. Hence Project 2 is profitable
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