Question

Which project should D&A should pick?

Project A:

t	0	1	2	3	4	5	6	7	8	9	10
CF		10,000	-55,000	155,000	125,000	119,000	113,500	201,500	123,000	-119,000	54,000

Project B:

t	0	1	2	3	4	5	6	7	8	9	10
CF		95,000	112,000	155,000	-125,000	119,000	-153,000	255,000	-113,000	139,000	39,000

The cost of capital (discount rate) for both projects is 7.89% /year. Based on the given information, please calculate the present value of the cash flow for both projects. Which project has a higher present value? Please show all MANUAL calculations NOT EXCEL.

Answer 1

Present value=Cash flows*Present value of discounting factor(rate%,time period)

A:

Present value

=10,000/1.0789-55000/1.0789^2+155000/1.0789^3+125,000/1.0789^4+119,000/1.0789^5+113500/1.0789^6+201500/1.0789^7+123000/1.0789^8-119000/1.0789^9+54000/1.0789^10

=$481662.18(Approx)

B:

Present value=

95000/1.0789+112000/1.0789^2+155000/1.0789^3-125000/1.0789^4+119000/1.0789^5-153000/1.0789^6+255000/1.0789^7-113000/1.0789^8+139000/1.0789^9+39000/1.0789^10

=$376562.98(Approx)

Hence A has a higher present value.