Question

The company that just hired you is trying to choose between two innovation projects using net present value. The two projects have the following cash flows:

Project 1: year 1 - $1,500; Year 2 - $2,000; Year 3 - $5,000; Year 4 - $3,000;

Project 2: year 1 - $5,000; Year 2 - $3,000; Year 3 - $1,500; Year 4 - $2,000;

Interest rate: 10%

Assignment a: Calculate the NPVs for each project

Assignment b: Which of these projects should the company choose?

Answer 1

a)	Project 1
	Year	Cash Flow	PV Factor	PV Of Cash Flow
	a	b	c=1/1.10^a	d=b*c
	1	$    1,500	0.909091	$ 1,363.64
	2	$    2,000	0.826446	$ 1,652.89
	3	$    5,000	0.751315	$ 3,756.57
	4	$    3,000	0.683013	$ 2,049.04
	Present value	$ 8,822.14
	Project 2
	Year	Cash Flow	PV Factor	PV Of Cash Flow
	a	b	c=1/1.10^a	d=b*c
	1	$    5,000	0.909091	$ 4,545.45
	2	$    3,000	0.826446	$ 2,479.34
	3	$    1,500	0.751315	$ 1,126.97
	4	$    2,000	0.683013	$ 1,366.03
	Present value	$ 9,517.79
b)	Since NPV of project 2 is greater , project 2 should be selected