Homework Answers
1.
| Discount rate | 1.95% | ||||||||||
| Project A | |||||||||||
| years | |||||||||||
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Cash flow | -$60,000 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 |
| Present value | -$60,000.00 | $8,827.86 | $8,659.01 | $8,493.39 | $8,330.93 | $8,171.59 | $8,015.29 | $7,861.98 | $7,711.60 | $7,564.10 | $7,419.42 |
| NPV | $21,055.16 | ||||||||||
| Project B | |||||||||||
| years | |||||||||||
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Cash flow | -$60,000 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $27,000.00 | $27,000.00 | $27,000.00 |
| Present value | -$60,000.00 | $1,961.75 | $1,924.22 | $1,887.42 | $1,851.32 | $1,815.91 | $1,781.18 | $1,747.11 | $23,134.81 | $22,692.31 | $22,258.27 |
| NPV | $21,054.29 | ||||||||||
At discount rate 1.95% NPV for both project is same.
2. b.
| Discount rate | 1.00% | ||||||||||
| Project A | |||||||||||
| years | |||||||||||
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Cash flow | -$60,000 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 |
| Present value | -$60,000.00 | $8,910.89 | $8,822.66 | $8,735.31 | $8,648.82 | $8,563.19 | $8,478.41 | $8,394.46 | $8,311.35 | $8,229.06 | $8,147.58 |
| NPV | $25,241.74 | ||||||||||
| Project B | |||||||||||
| years | |||||||||||
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Cash flow | -$60,000 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $27,000.00 | $27,000.00 | $27,000.00 |
| Present value | -$60,000.00 | $1,980.20 | $1,960.59 | $1,941.18 | $1,921.96 | $1,902.93 | $1,884.09 | $1,865.44 | $24,934.05 | $24,687.18 | $24,442.75 |
| NPV | $27,520.36 | ||||||||||
At discount rate 1%, i would accept Project B
3. a.
| Discount rate | 5.00% | ||||||||||
| Project A | |||||||||||
| years | |||||||||||
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Cash flow | -$60,000 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 |
| Present value | -$60,000.00 | $8,571.43 | $8,163.27 | $7,774.54 | $7,404.32 | $7,051.74 | $6,715.94 | $6,396.13 | $6,091.55 | $5,801.48 | $5,525.22 |
| NPV | $9,495.61 | ||||||||||
| Project B | |||||||||||
| years | |||||||||||
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Cash flow | -$60,000 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $27,000.00 | $27,000.00 | $27,000.00 |
| Present value | -$60,000.00 | $1,904.76 | $1,814.06 | $1,727.68 | $1,645.40 | $1,567.05 | $1,492.43 | $1,421.36 | $18,274.66 | $17,404.44 | $16,575.66 |
| NPV | $3,827.51 | ||||||||||
At discount rate 5%, i would accept Project A
4. d.
| Discount rate | 10.00% | ||||||||||
| Project A | |||||||||||
| years | |||||||||||
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Cash flow | -$60,000 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 | $9,000.00 |
| Present value | -$60,000.00 | $8,181.82 | $7,438.02 | $6,761.83 | $6,147.12 | $5,588.29 | $5,080.27 | $4,618.42 | $4,198.57 | $3,816.88 | $3,469.89 |
| NPV | -$4,698.90 | ||||||||||
| Project B | |||||||||||
| years | |||||||||||
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Cash flow | -$60,000 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $2,000.00 | $27,000.00 | $27,000.00 | $27,000.00 |
| Present value | -$60,000.00 | $1,818.18 | $1,652.89 | $1,502.63 | $1,366.03 | $1,241.84 | $1,128.95 | $1,026.32 | $12,595.70 | $11,450.64 | $10,409.67 |
| NPV | -$15,807.16 | ||||||||||
at 10% discount rate, i would not except any project as both the projects are producing negative NPV at 10% discount rate.
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