Question

XYZ Ltd is a company that is considering two alternative​ investments: Project A that would cost ​£40,000 and Project B that would cost £39,000.The chosen project would commence on 1 January next year​ ('Year 1'), when the initial investment would be made.As a result of the​ investment,SettloxLtd can expect to increase its cash flows over the life of the project by the following predicted​ amounts:

Year	Project C (£)	Project D (£)
1	10,000	16,000
2	12,000	4,000
3	21,000	17,000
4	23,000	13,000
5	18,000	25,000

​The discount rate to be applied to each project is​ 8%, and the relevant discount factors are shown​ here:

Period	Factor
1	0.926
2	0.857
3	0.794
4	0.735
5	0.681

Assuming that all cash flows other than the initial cost occur at the end of each​ year, calculate the net present value of each investment. Which project should be​ chosen?

First, think about how net present value​ (NPV) is​ defined: ​(Complete the necessary drop​ downs.)

NPV is a method of investment appraisal based on the ...........................of all relevant ..........................

Next, show the discounted cash flows in this​ table:

​(Fill in the relevant cells with their corresponding figures. Round amounts to the nearest​ £.)

	Project C (£)			Project D (£)
Year	Cash inflow	Discount factor	Present values	Cash inflow	Discount factor	Present values
1	10,000	0.926		16,000	0.926
2	12,000	0.857		4,000	0.857
3	21,000	0.794		17,000	0.794
4	23,000	0.735		13,000	0.735
5	18,000	0.681		25,000	0.681
Total present values				Total present values
Net cost investment				Net cost investment
Net present value				Net present value

The project to be chosen on the basis of its net present value would be Project ......... (Answer 'A' or​ 'B' here, or​ 'N' for​ neither)

Enter any number in the edit fields, then continue to the next question.

Answer 1

1. NPV is method of investment appraisal based on present values of all relevant future cash flows.

2.
Year Procject C Procject D Cash Inflow (4) Discounting Factor Present Value (4) Cash Inflow () Discounting Factor Present Value (1) 10,000 0.926 9,260 16,000 0.926 14,816 12,000 0.857 10,284 4,000 0.857 3,428 21,000 0.794 16,674 17,000 0.794 13,498 23,000 0.735 16,905 13,000 0.735 9,555 18,000 0.681 12,258 25,000 0.681 17,025 65,381 58,322 40,000 39,000 25,381 19,322 Total Present Value Net cost Investment Net Present Value NPV of Project "C" is more than Project "D" hence project "C" will be selected
3. Since NPV of project C is higher, Project C should be chosen.