Question

Labeau Products, Ltd., of Perth, Australia, has $20,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:

	Invest in Project X		Invest in Project Y
Investment required	$	20,000	$	20,000
Annual cash inflows	$	8,000
Single cash inflow at the end of 6 years			$	50,000
Life of the project	6 years		6 years

The company’s discount rate is 18%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Compute the net present value of Project X.

2. Compute the net present value of Project Y.

3. Which project would you recommend the company accept?

Answer 1

1
computation of net present value of project x
NPV= Annual cash inflow* PVIFA(r%,y) - Cost of investment
=$8000*PVIFA(18%,6)-$20000
=$8000*3.498 - $20000
=$7984
2
computation of net present value of project Y
NPV= Annual cash inflow* PVIF(r%,y) - Cost of investment
=$50000*PVIF(18%,6)-$20000
=$50000*0.370 - $20000
= -$1500
3 Labeau products ltd. Should accept Project X because its NPV is higher than Project Y NPV.