Question

As an investor you are investigating two different investment opportunities (projects) at time zero. Starting from year 1, Project A offers to pay you $500 every year for 10 years, whereas Project B offers to pay you $550 for the first year and a yearly increased amount for the next 8 years after year 1. Project B’s payment in year t+1 will be 1% higher than its payment in year t. In year 0, Project A costs $2200 while Project B costs $2250. If the discount rate for Project A is 10% and for Project B is 13%, which one of these two investment opportunities would you pick?

Answer #1

Statement showing NPV of project A

Year | Cash flow | PVIF @ 10% | PV |

A | B | C = A x B | |

1 | 500 | 0.9091 | 455 |

2 | 500 | 0.8264 | 413 |

3 | 500 | 0.7513 | 376 |

4 | 500 | 0.6830 | 342 |

5 | 500 | 0.6209 | 310 |

6 | 500 | 0.5645 | 282 |

7 | 500 | 0.5132 | 257 |

8 | 500 | 0.4665 | 233 |

9 | 500 | 0.4241 | 212 |

10 | 500 | 0.3855 | 193 |

Sum of PV of cash inflow | 3072 | ||

Less: Initial Investment | 2200 | ||

NPV | 872 |

Thus NPV of project A = 872$

Statement showing NPV of project B

Year | Cash flow | PVIF @ 13% | PV |

A | B | C = A x B | |

1 | 550.00 | 0.8850 | 487 |

2 | 555.50 | 0.7831 | 435 |

3 | 561.06 | 0.6931 | 389 |

4 | 566.67 | 0.6133 | 348 |

5 | 572.33 | 0.5428 | 311 |

6 | 578.06 | 0.4803 | 278 |

7 | 583.84 | 0.4251 | 248 |

8 | 589.67 | 0.3762 | 222 |

9 | 595.57 | 0.3329 | 198 |

Sum of PV of cash inflow | 2915 | ||

Less: Initial Investment | 2250 | ||

NPV | 665 |

Thus NPV of project B = 665$

Project A should be selected as it has higer NPV

As an investor you are investigating two different investment
opportunities (projects) at time zero. Starting from year 1,
Project A offers to pay you $500 every year for 10 years, whereas
Project B offers to pay you $500 for the first year and a yearly
increased amount for the next 8 years after year 1. Project B’s
payment in year t+1 will be 3% higher than its payment in year t.
In year 0, Project A costs $2200 while Project...

The management of Revco Products is exploring five different
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1
2
3
4
5
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$
(264,000
)
$
(435,000
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$
(418,000
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$
(364,000
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$
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Present value of cash inflows at a 10%
discount rate
334,640
510,970
398,360
444,600
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70,640
$
75,970
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2
3
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$
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$
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549,775
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416,102
399,353
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Year2
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Year 2
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