Question

Keller Construction is considering two new investments. Project E calls for the purchase of earth-moving equipment. Project H represents the investment in a hydraulic lift. Keller wishes to use a NPV profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B.

Project E ($40,000 investment)					Project H ($36,000 investment)
Year	Cash Flow				Year	Cash Flow
1		$9,000			1		$17,000
2		14,000			2		15,000
3		20,000			3		13,000
4		22,000

a. Determine the NPV of the projects based on a zero discount rate.

	NPV
Project E	$
Project H	$

b. Determine the NPV of the projects based on a 11 percent discount rate. (Round "PV Factors" to 3 decimal places. Round the final answers to the nearest whole dollar.)

	NPV
Project E	$
Project H	$

c. Not available in Connect.

d. If the two projects are not mutually exclusive, what would your acceptance or rejection decision be if the cost of capital (discount rate) is 10 percent? (Use the NPV profile for your decision; no actual numbers are necessary.)

• Project E

• Project H

• Both H and E

e. If the two projects are mutually exclusive (the selection of one precludes the selection of the other), what would be your decision if the cost of capital is (1) 8 percent, (2) 15 percent, (3) 20 percent? Use the NPV profile for your answer.

  

8% cost of capital	(Click to select)  Select Project E  Select Project H  Do not select either project
15% cost of capital	(Click to select)  Select Project H  Select Project E  Do not select either project
20% cost of capital	(Click to select)  Select Project E  Select Project H  Do not select either project

Answer 1

a) NPV At = 0% Discount Rate PROJECT H PROJECT E PV Of Cash Flow Cash Flow PV Factor PV Of Cash Flow Cash Flow PV Factor Year c= 1/1.0^a d3b*c f= 1/1.0^a g=e*f a -40,000 $ 1 $ -36,000 -36,000 -40,000 1 $ 1 $ 9,000 $ 17,000 9,000 17,000 2 $ 1 $ 1 $ 14,000 15,000 14,000 $ 15,000 3 $ 1 $ 1 $ 13,000 20,000 $ 13,000 20,000 4 $ 1 $ 1 $ 22,000 22,000 25,000 9,000 NPV

b) NPV At = 11% Discount Rate PROJECT H PROJECT E PV Of Cash Flow Cash Flow PV Factor PV Of Cash Flow Cash Flow PV Factor Year c= 1/1.0.11^a d=b*c f= 1/1.0.11g=e*f 1 $ 1 $ -40,000 $ -40,000 -36,000 -36,000 0.901 $ 1 $ 0.901 $ 8,109 $ 15,317 9,000 17,000 2 $ 0.812 $ 0.812 $ 11,368 $ 12,180 14,000 15,000 3 $ 0.731 $ 0.731 $ 14,620 $ 9,503 20,000 13,000 4 $ 0.659 $ 0.659 $ 22,000 14,498 NPV 8,595 1,000

d) 10% Discount Rate NPV At = PROJECT H PROJECT E PV Factor PV Of Cash Flow Cash Flow PV Of Cash Flow Cash Flow Year PV Factor c= 1/1.0.1^a f= 1/1.0.1^g3e*f b d=b*c a 1.000 $ 1.000 $ -40,000 -40,000 $ -36,000 -36,000 1 $ 0.909 $ 0.909 $ 9,000 15,455 8,182 $ 17,000 0.826 $ 2 $ 0.826 $ 11,570 $ 15,000 12,397 14,000 3 $ 0.751 $ 0.751 $ 20,000 15,026 $ 13,000 9,767 0.683 $ 4 $ 0.683 $ 22,000 15,026 1,618 NPV 9,805 Since the NPV of both project is positive. Both H and E should be accepted.

8% cost of capital e) 8% Discount Rate NPV At = PROJECT E PROJECT H PV Of Cash Flow Cash Flow PV Factor PV Of Cash Flow f= 1/1.0.08 g=e*f Cash Flow Year PV Factor c= 1/1.0.08^a d=b*c b -40,000 $ 1.000 $ 1.000 $ -36,000 -36,000 -40,000 0.926 $ 0.926 $ 8,333 $ 9,000 17,000 15,741 2 $ 0.857 $ 15,000 0.857 $ 12,003 $ 14,000 12,860 3 $ 0.794 $ 0.794 $ 20,000 15,877 $ 13,000 10,320 4 $ 0.735 $ 0.735 $ 16,171 22,000 2,921 NPV 12,383 Since the NPV of project E is greater. Porject E should be selected.

15% cost of capital 15% Discount Rate NPV At = PROJECT E PROJECT H PV Of Cash Flow Cash Flow PV Factor PV Of Cash Flow Cash Flow Year PV Factor c= 1/1.0.15^a d=b*c f= 1/1.0.15 g=e*f e -36,000 -40,000 1.000 $ -40,000 $ -36,000 1.000 $ 1 $ 0.870 $ 0.870 $ 7,826 $ 9,000 17,000 14,783 2 $ 0.756 $ 0.756 $ 14,000 10,586 $ 11,342 15,000 3 $ 0.658 $ 13,000 0.658 $ 20,000 13,150 $ 8,548 4 $ 0.572 $ 0.572 $ 22,000 12,579 NPV -1,328 4,141 Since the NPV of project E is greater. Porject E should be sele cted.

20% cost of capital 20% Discount Rate NPV At = PROJECT E PROJECT H PV Of Cash Flow Cash Flow PV Factor PV Of Cash Flow f= 1/1.0.2^g=e*f Cash Flow Year PV Factor c= 1/1.0.2^a b d=b*c 1.000 $ -40,000 $ 7,500 $ 1.000 $ -40,000 -36,000 -36,000 1 $ 0.833 $ 0.833 $ 14,167 9,000 17,000 2 $ 14,000 0.694 $ 0.694 $ 9,722 $ 10,417 15,000 3 $ 0.579 $ 0.579 $ 20,000 11,574 $ 13,000 7,523 4 $ 0.482 $ 0.482 $ 22,000 10,610 NPV -3,894 -594 Do not select either project %24