Question

Two projects A and B have a10% cost of capital and the cashflow below, calculate the net present value (NPV) and state if we should invest in the projects and why

Year	Cash Flow (A)	Cash Flow (B)
0	-$60,000	-$70,000
1	23,000	15,000
2	28,000	18,000
3	21,000	26,000
4	8,000	230,000

Answer 1

ANS: Currency in $

Calculation of NPV of Project A

Year	Cash Flow	PVF @ 10%	PV of Cash Flow
0	-60000	1	-60000
1	23000	0.909	20907
2	28000	0.826	23128
3	21000	0.751	15771
4	8000	0.683	5464
	NPV		5270

Decision: Project A should be accepted as it has positive NPV.

  Calculation of NPV of Project B

Year	Cash Flow	PVF @10%	PV of Cash flow
0	-70000	1	-70000
1	15000	0.909	13635
2	18000	0.826	14868
3	26000	0.751	19526
4	230000	0.683	157090
	NPV		135119

Decision: Project B should be accepted as it has positive NPV.

Note: If ranking is given as per profitability of the project, then Project B holds rank 1 & Project A holds rank 2 as the NPV of project B is higher than Project A.