Question

Carr Company has to choose between two capital investment proposals (Important: It can only fund one of them). Estimates regarding each project are provided below: Project Soup Project Nuts Initial investment $400,000 $600,000 Annual net income 30,000 46,000 Net annual cash inflow 110,000 146,000 Estimated useful life 5 years 6 years Salvage value -0- -0- The company requires a 10% rate of return on all new investments. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.890 3.791 3.696 3.605 6 4.486 4.355 4.231 4.111 The net present value for Project Soup is a. $17,010 b. $50,000 c. $117,010 d. $550,000

The internal rate of return for Project Soup is

	a.	greater than the discount rate of 10%
	b.	less than the discount rate of 10%
	c.	equal to the discount rate of 10%
	d.	none of the above.

The net present value for Project Nuts is

	a.	$635,830
	b.	$200,330
	c.	$100,000
	d.	$35,830

Answer 1

For project soup,

net present value of net cash inflows = net annual cash inflows * annuity factor at 10% for 5 years

= 110000 * 3.791

= $ 417010

Net present value of project soup = 417010- 400000

= $ 17010

Internal rate of return for project soup will be HIGHER THAN 10% because npv have indirect relation with discount rate which means NPV will decrease when we increase the discount rate.

Net Present value of cash inflows for project nuts = net annual cash inflows * annuity factor at 10% for 6 years

= 146000 * 4.355

= $ 635830

Net Present value for project NUTS = 635830 - 600000

= $ 35,830