Question

Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial investment. Compute the present value of the cash inflows for each investment using a 9% discount rate. (PLEASE ROUND EACH DISCOUNTED CASH FLOW TO THE NEAREST CENT)

Year	Investment X	Investment Y
1	$2,500	4,000
2	3,000	3,500
3	3,500	3,000
4	4,000	2,500
Total	$13,000	$13,000

1. (Total: 6 marks; 3 marks for X and Y each)

Answer 1

Calculation of Net Present Value Investment X Discount Rate 9.0% Year 1 2 3 4 Discounting Factor 0.917 0.842 0.772 0.708 Undiscounted Cash Flow 2,500.00 3,000.00 3,500.00 4,000.00 Present Value 2,293.58 2,525.04 2,702.64 2,833.70 Net Present Value 10,354.96 Investment Y Discount Rate 9.0% Year 1 2. 3 Discount Factor 0.917 0.842 0.772 0.708 Undiscounted Cash Flow 4,000.00 3,500.00 3,000.00 2,500.00 Present Value 3,669.72 2,945.88 2,316.55 1,771.06 Net Present Value 10,703.22 Since the both investment needs same initial investment the one with highest NPV will be beneficial to the company Here Investment is beneficial