Question

FMA investment company is evaluating the following two projects. the cost of each project is 70,000 AED and the cost of capital is 9%. using the net present value method, which project should the company choose and why?

the annuall cash flows are as follows:

Year	Project A	Project B
1	20,000	14,000
2	12,000	23,000
3	12,000	26,000
4	30,000	30,000

Answer 1

Cost of each project 70,000 AED

Net present value = present value of cash inflows - Initial investment

Computation of Net present value of Project A.

Net present value = 20,000 / (1.09)¹ + 12,000 / (1.09)² + 12,000 / (1.09)³ + 30,000 / (1.09)⁴ - 70,000

Net present value = 58,967.74 - 70,000

Net present value = - 11,032.26

Computation of Net present value of Project B.

Net present value = 14,000 / (1.09)¹ + 23,000 / (1.09)² + 26,000 / (1.09)³ + 30,000 / (1.09)⁴ - 70,000

Net present value = 73,532.20 - 70,000

Net present value = 3,532.20

Company should choose project B, because of higher net present value. project A has negative Net present value and company would loose money f it selects project A

So, Project B should be selected