Question

(Ignore income taxes in this problem.) Monson Company is considering three investment opportunities with cash flows as described below:

Project A: Cash investment now Cash inflow at the end of 5 years......... Cash inflow at the end of 8 vears... $15,000 $21,000 $21,000 Project B: Cash investment now ...... Annual cash outflow for 5 years ......... Additional cash inflow at the end of 5 years....... $11,000 $3,000 $21,000 Project C: Cash investment now ........ Annual cash inflow for 4 years ......... Cash outflow at the end of 3 years ..... Additional cash inflow at the end of 4 years....... $21,000 $11,000 $5,000 $15,000

Required:

Compute the net present value of each project assuming Monson Company uses a 12% discount rate. Which Project should Monson choose and why?

Answer 1

Project A (Net present value = 1/(1+r)^n) Project B Year Particulars Present value factor Project A Discounted cash flows Year Particulars Present value factor Project B Discounted cash flows 0 Initial investment 0 Initial investment Cash outflow Cash outflow Cash outflow Cash outflow Cash outflow Cash inflow 1 - 15000 $-15,000.00 0.892857 0.797194 0.71178 0.635518 0.567427 21000 $ 11,915.96 0.506631 0.452349 0.403883 21000 $ 8,481.55 Net present value $ 5,397.51 1 - 11000 $-11,000.00 0.892857 -3000 $ -2,678.57 0.797194 -3000 $ -2,391.58 0.71178 -3000 $ -2,135.34 0.635518 -3000 $ -1,906.55 0.567427 -3000 $ -1,702.28 0.567427 21000 $ 11,915.96 Net present value $ -9,898.36 4 5 Cash inflow 5 8 Cash inflow

Project C Year Particulars Initial investment Cash inflow Cash inflow Cash inflow Cash outflow Cash inflow Additional cash inflow Present Discounted value Project C cash flows factor а atb -21000 $-21,000.00 0.892857 11000 $ 9,821.43 0.797194 11000 $ 8,769.13 0.71178 11000 $ 7,829.58 0.71178 -5000 $ -3,558.90 0.635518 11000 $ 6,990.70 0.635518 15000 $ 9,532.77 Net present value $ 18,384.71 Monson Company should choose Project C, because it gives highest Net present value I hope this solves your doubt. Feel free to comment if you still have any query or need something else. I'll help asap. Do give a thumbs up if you find this helpful, Thank you