Question

# You are a financial analyst for the Hittle Company. The director of capital budgeting has asked...

You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyse two proposed capital investments, Projects X and Y. Each project has a cost of \$10,000, and the cost of capital for each project is 12 percent. The projects expected net cash flows are as follows:

 Year Project X Project y 0 (\$10,000) (\$10,000) 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500

Calculate each project’s net present value (NPV)

#### Homework Answers

Answer #1

X:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=6500/1.12+3000/1.12^2+3000/1.12^3+1000/1.12^4

=10966.01

NPV=Present value of inflows-Present value of outflows

=10966.01-10,000

=\$966.01(Approx)

Y:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=3500/1.12+3500/1.12^2+3500/1.12^3+3500/1.12^4

=10630.72

NPV=Present value of inflows-Present value of outflows

=10630.72-10,000

=\$630.72(Approx).

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