Question

4. Capital Budgeting: This question has five parts. Here you have to find Net Present Value (NPV) for the two projects. (Show all work.) (15 points)

	Expected Net Cash Flows
Year	Project A	Project B
0	($5,000)	($5,000)
1	$700	$750
2	$1,000	$1,250
3	$3,250	$3,000
4	$3,500	$3,250

______ 4a. If the opportunity cost of capital is 10%, what is the NPV of Project A (round to the nearest penny)?

______ 4b. If the opportunity cost of capital is 10%, what is the NPV of Project A (round to the nearest penny)?

4c. If you have a choice between Project A and Project B, which one would you choose and why?

Answer 1

4a. NPV of Project A =Present Value of Cash Inflows- Present Value of Cash Outflows

= [700*1/(1.1)^1+1000*1/(1.1)^2+3250*1/(1.1)^3+3500*1/(1.1)^4]-5000

= $ 1,295.13

Answer = $ 1,295.13

4b.

NPV of Project A =Present Value of Cash Inflows- Present Value of Cash Outflows

= [750*1/(1.1)^1+1250*1/(1.1)^2+3000*1/(1.1)^3+3250*1/(1.1)^4]-5000

= $ 1,188.61

Answer = $ 1,188.61

4c. Answer = Project A.

Note: Since project A has a higher NPV than project B, Project A would be chosen.