Question

D. Project A requires an original investment of $50,000. The project will yield cash flows of $14,200 per year for seven years. Project B has a calculated net present value of $2,470 over a four-year life. Project A could be sold at the end of four years for a price of $14,100. Below is a table for the present value of $1 at Compound interest. Year 6% 10% 12% 1 0.943 0.909 0.893 2 0.890 0.826 0.797 3 0.840 0.751 0.7121 4 0.792 0.683 0.636 5 0.747 0.621 0.567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 0.943 0.909 0.893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605

Answer 1

Note:	Minimum required rate of return is 12%
	So discounting factor for net present value is taken @ 12%
Solution: A
	CACLULATION OF THE PRESENT VALUE OF PROJECT
	Years	Cash Inflow (Outflow)	PVF of $ 1 @ 12%	Present Value (A XB)
	0	$                    -50,000	1.0000	$       -50,000.00
	1	$                      14,200	0.8929	$         12,678.57
	2	$                      14,200	0.7972	$         11,320.15
	3	$                      14,200	0.7118	$         10,107.28
	4	$                      14,200	0.6355	$           9,024.36
	4 - Salvage	$                      14,100	0.6355	$           8,960.80
				$           2,091.17
	Total Net Present Value of Project =		$           2,091.17
Solution: B
	Net Present value of Project A =	$                     2,091.17
	Net Present value of Project B =	$                     2,470.00
	Project B have the greater present value so Project B is selected
	Answer = Project B