The PZ firm is evaluating the following two mutually exclusive projects. One asset has a 3 year life, whereas the other has a 6 year life. The firm has a required rate of return of 15%. Based on your capital budgeting analysis the firm should _____(accept or reject)________ Asset A and ____(accept or reject)_______ Asset B.
Year | Asset A | Asset B |
0 | ($60,000) | ($51,500) |
1 | 40,000 | 13,000 |
2 | 20,000 | 19,000 |
3 | 17,000 | 11,000 |
4 | 20,000 | |
5 | 10,000 | |
6 | 8,000 |
Discount rate | 15.0000% | ||
Cash flows | Year | Discounted CF= cash flows/(1+rate)^year | Cumulative cash flow |
(60,000.00) | 0 | (60,000.00) | (60,000.00) |
40,000.000 | 1 | 34,782.61 | (25,217.39) |
20,000.000 | 2 | 15,122.87 | (10,094.52) |
17,000.000 | 3 | 11,177.78 | 1,083.26 |
NPV of A = 1083.26
PV = 1083.26, FV = 0, rate = 15%, N = 3
use PMT function in Excel
EAA of A = 474.44
Discount rate | 15.0000% | ||
Cash flows | Year | Discounted CF= cash flows/(1+rate)^year | Cumulative cash flow |
(51,500.00) | 0 | (51,500.00) | (51,500.00) |
13,000.000 | 1 | 11,304.35 | (40,195.65) |
19,000.000 | 2 | 14,366.73 | (25,828.92) |
11,000.000 | 3 | 7,232.68 | (18,596.24) |
20,000.000 | 4 | 11,435.06 | (7,161.18) |
10,000.000 | 5 | 4,971.77 | (2,189.41) |
8,000.000 | 6 | 3,458.62 | 1,269.21 |
NPV of B = 1269.21
PV = 1269.21, FV = 0, N = 6, rate = 15%
use PMT funciton in Excel
EAA of B = 335.37
accept A and reject B
The PZ firm is evaluating the following two mutually exclusive projects. One asset has a 3 year...
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