Question

Before whoever decides to answer the following problems, please DO NOT use excel. I have posted this question already, and the expert answered using excel to solve this problem. I am not good with excel at all so I did not understand what was given. Would rather have the problem worked out showing the formula and work broken down and written out. Thank you in advance.

You have been assigned the task of evaluating two mutually exclusive projects with the following projected cash​ flows:

YEAR --- PROJECT A CASH FLOW --- PROJECT B CASH FLOW
0 ------------- -100,000    ---------------   -100,000
1 --------------- 33,000 ---------------               0
2 --------------- 33,000 ---------------               0
3 --------------- 33,000 ---------------               0
4 --------------- 33,000 ---------------               0
5 --------------- 33,000 ---------------    210,000

If the appropriate discount rate on these projects is 12 percent, which would be chosen and why?

1. What is the NPV of project​ A?

____(round to the nearest cent.)

2. What is the NPV of project​ B?

____(round to the nearest cent.)

Answer 1

1. The NPV of project A is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the NPV will be as follows:

= - $ 100,000 + $ 33,000 / 1.12¹ + $ 33,000 / 1.12² + $ 33,000 / 1.12³ + $ 33,000 / 1.12⁴ + $ 33,000 / 1.12⁵

= $ 18,957.61 Approximately

2. The NPV of project B is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the NPV will be as follows:

= - $ 100,000 + $ 210,000 / 1.12⁵

= $ 19,159.64 Approximately

Since the NPV of project B is greater than the NPV of project A, hence Project B shall be chosen, since it will add more value to the firm by $ 202.03. ( $ 19,159.64 - $ 18,957.61 ).

Feel free to ask in case of any query relating to this question