Question

. Use the NPV to decide which of the two projects Vita Nova should accept for...

. Use the NPV to decide which of the two projects Vita Nova should accept for Fall 2020 if the projects are independent:

      Years                                 Project 1                                              Project 2

        0                                      -$7,300                                                -$4,390

        1                                      $3,940                                               $2,170

        2                                      $3,450                                               $2,210

        3                                        $2,480                                               $1,730

       Assume the required rate of return is 15%.

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Answer #1

Calculation of NPV at required rate of return is 15%.

PROJECT 1

Year Inflows PV factor@15% Present Value
1 3940 0.8696 3426
2 3450 0.7561 2609
3 2480 0.6575 1631
7666

Net Present Value = Total Present value of inflows - Initial investment

Here Initial investment of Project 1= 7300, Present value of inflows = 7666

NPV of PROJECT 1 = 7666 - 7300 = 366

PROJECT 2

Year Inflows PV factor@15% Present Value
1 2170 0.8696 1887
2 2210 0.7561 1671
3 1730 0.6575 1137
4695

Net Present Value = Total Present value of inflows - Initial investment

Here Initial investment of Project 2 = 4390, Present value of inflows = 4695

NPV of PROJECT 2 = 4695- 4390 = 305

Since NPV is higher, Project 1 can be accepted.

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