Question

Labeau Products, Ltd., of Perth, Australia, has $35,000 to invest. The company is trying to decide between two alternative uses for the funds as follows: (Ignoreincome taxes.)

Invest in
Project X Invest in
Project Y
Investment required $35,000 $35,000
Annual cash inflows $9,000
Single cash inflow at the end of 10 years $150,000
Life of the project 10 years 10 years

The company's discount rate is 18%.

(1)

Determine the net present value. (Round your answer to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the "$" sign in yourresponse.)

Net Present
Value
Project X $
Project Y $

(2) Which investment would you recommend that the company accept?

Answer 1

Project X:

Present value of an annuity of one dollar at a discount rate of 18% for 6 years is 3.498

Since annual cash inflows are $ 12,000, the present value of cash inflows is 12,000 x 3.498 =$ 41,976

Therefore, Net Present Value is 41,976-35,000 =$ 6,976

Project Y:

Present value of one dollar at discount rate of 18% at the end of 6 years is 0.370. Therefore the present value of the single cash flow is 90,000 x 0.370 = $ 33,300. NPV is a negative $1,700.

Therefore, Project X is recommended as it leads to a positive NPV of $ 6,976