Question

Your division is considering two investment projects, each of which requires an upfront expenditure of $15 million. You estimate that the investments will produce the following         cash flows:

                                    Year                            Project A                     Project B

                                    1                                  $5,000,000                  $20,000,000

                                    2                                  10,000,000                  10,000,000

                                    3                                  20,000,000                      6,000 000

            a.         What is the net present value of the two projects if the cost of capital is 5%, 10%,                          15%?

Answer 1

Year	Project A	Project B
0	(15,000,000.00)	(15,000,000.00)
1	5,000,000.00	20,000,000.00
2	10,000,000.00	10,000,000.00
3	20,000,000.00	6,000,000.00
NPV at 5%	16,108,951.52	18,300,939.42
NPV at 10%	12,836,213.37	15,954,169.80
NPV at 15%	10,059,587.41	13,897,838.42

WORKINGS