Question

Note: Please answer the second question

(b) Should we choose Projects A, C, D or Projects A, B, D. Explain

The following is a list of four projects that Capital Corporation must choose from for the coming year: Project Project Price Annual Net Inflows

A                   700,000                      118,861

B                   670,000                      109,039

C                 184,000                       32,549

D                  273,000                      48,305

Given a uniform rate of interest of 9% and a uniform life of the projects of 10 years each, calculate the NPVs of each Project (To calculate NPV, calculate the Present Value of a 10 year annuity, and subtract the project price. You can use Excel to do this calculation - it is the easiest process. Open excel, go to formula button (fx), select category financial, select PV or present value, Rate is the rate of interest (9% or .09) NPER is the number of years (10) and Pmt is negative of the yearly Net Inflows (Its negative because excel assumes that Pmt means you are making payments, whereas in this problem you are receiving net revenues). Once you input that for each project excel will give you the Present Values for each project. Once you get the present values or PV subtract from each the Project Price to get the NPV.

		PV		FC		Npv
-118861		$762,809.21		700000		$62,809.21
-109039		$699,774.98		670000		$29,774.98
-32549		$208,888.34		184000		$24,888.34
-48305		$310,004.96		243000		$67,004.96

(b) Should we choose Projects A, C, D or Projects A, B, D. Explain

Answer 1

Now if we try to decide which combination of projects to choose we can think of one method ie B/C

Ratio of (PW of Benefit/PW of Cost)-1 if this number comes >=9% we will choose that project

BC for A=(PW of Benefit/PW of Cost)-1=8.97%

BC for B=(PW of Benefit/PW of Cost)-1=4.44%

BC for C=(PW of Benefit/PW of Cost)-1=13.52%

BC for D=(PW of Benefit/PW of Cost)-1=27.57%

Hence BC for B is much smaller than that of other BC's and less than 9%

Hene projects A,C,D are to be chosen