Question

Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Project E					Project H
($23,000 Investment)					($25,000 Investment)
Year	Cash Flow				Year	Cash Flow
1	$	7,000			1	$	19,000
2		10,000			2		10,000
3		11,000			3		9,000
4		14,000

a. Determine the net present value of the projects based on a zero percent discount rate.

b. Determine the net present value of the projects based on a discount rate of 10 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)

c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 10 percent?

• Project E

• Project H

• Both H and E

Answer 1

Answer a.

Discount Rate = 0%

Project E:

Net Present Value = -$23,000 + $7,000 + $10,000 + $11,000 + $14,000
Net Present Value = $19,000

Project H:

Net Present Value = -$25,000 + $19,000 + $10,000 + $9,000
Net Present Value = $13,000

Answer b.

Discount Rate = 10%

Project E:

Net Present Value = -$23,000 + $7,000/1.10 + $10,000/1.10^2 + $11,000/1.10^3 + $14,000/1.10^4
Net Present Value = $9,454.75

Project H:

Net Present Value = -$25,000 + $19,000/1.10 + $10,000/1.10^2 + $9,000/1.10^3
Net Present Value = $7,299.02

Answer c.

If the projects are not mutually exclusive, then both projects should be accepted as net present values at discount rate of 10% are positive.