Question

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)

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).