Question

You've estimated the following cash flows (in $) for two projects:

Year	Project A	Project B
0	-5,400	-8,100
1	1,325	1,325
2	2,148	2,148
3	3,942	7,751

The required return for both projects is 8%.

A:What is the NPV for project A?

B:What is the NPV for project B?

C:Which project seems better according to the NPV method?

Answer 1

The NPV is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

A. The NPV of Project A is computed as follows:

= - $ 5,400 + $ 1,325 / 1.08 + $ 2,148 / 1.08² + $ 3,942 / 1.08³

= $ 797.70 Approximately

B. The NPV of Project B is computed as follows:

= - $ 8,100 + $ 1,325 / 1.08 + $ 2,148 / 1.08² + $ 7,751 / 1.08³

= $ 1,121.41 Approximately

C. The Project B is better since the NPV of Project B is greater than the NPV of Project A.

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