Question

Project A requires an original investment of 551,600. The project will yield cash flows of $14,200 per year for seven years. Project B has a calculated net present value of $2,960 over a four year life. Project A could be sold at the end of four years for a price of $18,500. Below is a table for the present value of s1 at Compound interest. Year 6% 10% 12% 0.943 0.909 0.893 0.890 0.826 0.797 0.840 0.751 0.712 0.792 0.683 0.636 0.747 0.621 0.567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 12% 0.943 10% 0.909 1.736 0.893 1.833 1.690 2.673 2.487 3.465 4.212 3.170 3.791 2.402 3.037 3.605

1) Using the present value tables above, determine the net present value of Project A over a four-year life salvage value assuming a minimum rate of return of 12%. Round answer to two decimal places.

2) Which Project provides the greatest net present value?

-Project A or Project B

Answer 1

1) Net present value Project A = Present value of cash inflow-Present value of cash outflow

= (14200*3.037+18500*.636)-51600

Net present value of project A = $3291

2) Greatest present value = Project A