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 $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 B costs $2250. If the discount rate for Project A is 10% and for Project B is 11%, 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 @ 11% | PV |

A | B | C = A x B | |

1 | 550.00 | 0.9009 | 495 |

2 | 566.50 | 0.8116 | 460 |

3 | 583.50 | 0.7312 | 427 |

4 | 601.00 | 0.6587 | 396 |

5 | 619.03 | 0.5935 | 367 |

6 | 637.60 | 0.5346 | 341 |

7 | 656.73 | 0.4817 | 316 |

8 | 676.43 | 0.4339 | 294 |

9 | 696.72 | 0.3909 | 272 |

Sum of PV of cash inflow | 3368 | ||

Less: Initial Investment | 2250 | ||

NPV | 1118 |

Thus NPV of project B = 1118$

Since NPV of project B is more than project A, Project B should be selected

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...

The management of Revco Products is exploring five different
investment opportunities. Information on the five projects under
study follows:
Project Number
1
2
3
4
5
Investment required
$
(264,000
)
$
(435,000
)
$
(418,000
)
$
(364,000
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$
(500,000
)
Present value of cash inflows at a 10%
discount rate
334,640
510,970
398,360
444,600
579,200
Net present value
$
70,640
$
75,970
$
(19,640
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$
80,600
$
79,200
Life of the project
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study follows:
Project Number
1
2
3
4
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$
(540,000
)
$
(390,000
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$
(340,000
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Present value of cash inflows at
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549,775
715,947
416,102
399,353
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$
99,775
$
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$
26,102
$
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Year 1
Year2
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$6,500
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Year 1
Year 2
Year 3
Year 4
A
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$26
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$19
$15
B
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$22
$42
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