Question

You are asked to evaluate the following two projects for the XTREME Corporation, using the net present value method.

a. which project would you select? Use a discount rate of 14 percent.

b. Which project will you select if cost of capital is 24%?

Project X              ($20,000 Investment)

Year                                                                                                       Cash Flow

1 .....................                                                                                $10,000

2 .....................                                                                                  8,000

3 .....................                                                                                  9,000

4 .....................                                                                                  8,600

Project Y              ($40,000 Investment)

Year                                                                                                       Cash Flow

1 .....................                                                                                  $20,000

2 .....................                                                                                  13,000

3 .....................                                                                                  14,000

4 .....................                                                                                  16,000

Include financial calculator steps, including the keys pressed on the calculator to solve each step.

Answer 1

The net present value takes into account present value of all future cash flows discounted using cost of capital and then the amount of investments made is subtracted to see if the project can generate value for the firm.

a)

1) First in financial calculator clear the cash flows already inserted by pressing

CF then 2nd then Clr Work

2) Then enter for Project X the investment amount as under:

20000 then +|- then enter then press down arrow

3) CO1 will appear after that which needs an input for Cash flow of year 1

10000 then enter then press down arrow then press (FO1 will take input of 1 as frequency of this cash flow is once) 1 and then enter then press down arrow

4) CO2 will appear after that which needs an input for Cash flow of year 2

8000 then enter then press down arrow then press (FO2 will take input of 1 as frequency of this cash flow is once) 1 and then enter then press down arrow

5) CO3 will appear after that which needs an input for Cash flow of year 3

9000 then enter then press down arrow then press (FO3 will take input of 1 as frequency of this cash flow is once) 1 and then enter then press down arrow

6) CO4 will appear after that which needs an input for Cash flow of year 4

8600 then enter then press down arrow then press (FO2 will take input of 1 as frequency of this cash flow is once) 1 and then enter

7) Now all cash flows are entered.

Now press NPV. An input for interest rate, I would be asked. Enter 14. Then press down arrow. Finally press CPT button to get the NPV as $6094.30 for Project X.

Similarly for Project Y

1) First in financial calculator clear the cash flows already inserted by pressing

CF then 2nd then Clr Work

2) Then enter for Project Y the investment amount as under:

40000 then +|- then enter then press down arrow

3) CO1 will appear after that which needs an input for Cash flow of year 1

20000 then enter then press down arrow then press (FO1 will take input of 1 as frequency of this cash flow is once) 1 and then enter then press down arrow

4) CO2 will appear after that which needs an input for Cash flow of year 2

13000 then enter then press down arrow then press (FO2 will take input of 1 as frequency of this cash flow is once) 1 and then enter then press down arrow

5) CO3 will appear after that which needs an input for Cash flow of year 3

14000 then enter then press down arrow then press (FO3 will take input of 1 as frequency of this cash flow is once) 1 and then enter then press down arrow

6) CO4 will appear after that which needs an input for Cash flow of year 4

16000 then enter then press down arrow then press (FO2 will take input of 1 as frequency of this cash flow is once) 1 and then enter

7) Now all cash flows are entered.

Now press NPV. An input for interest rate, I would be asked. Enter 14. Then press down arrow. Finally press CPT button to get the NPV as $6469.82 for Project Y.

Thus, as the NPV is higher for Project Y, Project Y should be selected in case of mutually exclusive projects. If capital is not a constraint, then both projects can be selected as the NPV is positive for both.

b)

1) First in financial calculator clear the cash flows already inserted by pressing

CF then 2nd then Clr Work

2) Then enter for Project X the investment amount as under:

20000 then +|- then enter then press down arrow

3) CO1 will appear after that which needs an input for Cash flow of year 1

10000 then enter then press down arrow then press (FO1 will take input of 1 as frequency of this cash flow is once) 1 and then enter then press down arrow

4) CO2 will appear after that which needs an input for Cash flow of year 2

8000 then enter then press down arrow then press (FO2 will take input of 1 as frequency of this cash flow is once) 1 and then enter then press down arrow

5) CO3 will appear after that which needs an input for Cash flow of year 3

9000 then enter then press down arrow then press (FO3 will take input of 1 as frequency of this cash flow is once) 1 and then enter then press down arrow

6) CO4 will appear after that which needs an input for Cash flow of year 4

8600 then enter then press down arrow then press (FO2 will take input of 1 as frequency of this cash flow is once) 1 and then enter

7) Now all cash flows are entered.

Now press NPV. An input for interest rate, I would be asked. Enter 24. Then press down arrow. Finally press CPT button to get the NPV as $1625.39 for Project X.

Similarly for Project Y

1) First in financial calculator clear the cash flows already inserted by pressing

CF then 2nd then Clr Work

2) Then enter for Project Y the investment amount as under:

40000 then +|- then enter then press down arrow

3) CO1 will appear after that which needs an input for Cash flow of year 1

20000 then enter then press down arrow then press (FO1 will take input of 1 as frequency of this cash flow is once) 1 and then enter then press down arrow

4) CO2 will appear after that which needs an input for Cash flow of year 2

13000 then enter then press down arrow then press (FO2 will take input of 1 as frequency of this cash flow is once) 1 and then enter then press down arrow

5) CO3 will appear after that which needs an input for Cash flow of year 3

14000 then enter then press down arrow then press (FO3 will take input of 1 as frequency of this cash flow is once) 1 and then enter then press down arrow

6) CO4 will appear after that which needs an input for Cash flow of year 4

16000 then enter then press down arrow then press (FO2 will take input of 1 as frequency of this cash flow is once) 1 and then enter

7) Now all cash flows are entered.

Now press NPV. An input for interest rate, I would be asked. Enter 24. Then press down arrow. Finally press CPT button to get the NPV as -$1305.83 for Project Y.

Thus, as the NPV is positive for Project X and negative for Project Y, only Project X should be selected.

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