Question

After the successful experience of the taxi project, Mr. Mano decided to expand; he surveyed the market and found the following project opportunities: Project X requires an initial investment of O.R 100,000 and produces annual cash flows of O.R 45,000 per year for each of the next 3 years. Project Y requires an initial investment of O.R 115,000 and produces cash flows of O.R 30,000 in year 1, O.R 50,000 in year 2, and O.R 80,000 in year 3. If Mano’s required rate of return is 10% and the projects are not mutually exclusive. Which project should Mr. Mano undertake?

Answer 1

Net Present Value of Project X = [cash flow * PVIFA(10%, 3) ] - Initial investment = (45000 * 2.4869 ) - 100000 = $11910.5

Net Present Value of Project Y = [Cash flow for year 1 * PVIF(10% , 1) ] + [Cash flow for year 2 * PVIF(10% , 2) ] + [Cash flow for year 3 * PVIF(10% , 3) ] - Initial investment = [30000 * 0.9091 ] + [50000 * 0.8264 ] + [80000 * 0.7513 ] - 115000 = 128697 - 115000 = $13697

Mr. Mano must under take Project Y, being having the highest NPV of the two projects.