Question

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All the firm’s cash inflows have already been adjusted for taxes.
a.	Evaluate the projects using risk-adjusted discount rates.
b.	Discuss your findings in part a, and recommend the preferred project.
Solution
a.	Evaluate the projects using risk-adjusted discount rates.
	Project A
	Initial investment		-$          20,000
	Project life (years)		5
	Annual cash inflow		$            7,000
	Required return		8%
	PV of cash inflows
	NPV
	Project B
	Initial investment		-$          30,000
	Project life (years)		5
	Annual cash inflow		$          10,000
	Required return		14%
	PV of cash inflows
	NPV

Answer 1

Answer-

a) Assuming the solution row is from row no. 1

Project A

Value of PV of cash inflows= $27,948.97. Excel formula is" =PV(D9,D7,-D8,0,0)" Remove inverted commas in excel

Value of NPV = $7948.97. Excel formula is "=D10+D6" Remove inverted commas in excel.

Project B

Value of PV of cash inflows= $34,330.81. Excel formula is "=PV(D17,D15,-D16,0,0)" Remove inverted commas in Excel

Value of NPV = $4,330.81. Excel formula is "=D18+D14" Remove inverted commas in Excel

b) As we see the net present value of project A is greater than Project B hence project A is recommended. Although Project has greater cash inflows but it also demands greater investment and higher rate of return. Thus the NPV is lower for project B.