Question

Emmar is considering investment in the best of two independent projects. Project A involves an overhaul of the existing system; it will cost $47,000 and generate cash inflows of $21,000 per year for the next 3 years. Project B involves replacement of the existing system; it will cost $276,000 and generate cash inflows of $61,000 per year for 6 years. Using an 8% cost of capital, calculate each project's NPV, and make a recommendation based on your findings.

Answer 1

Project A

NPV=-47000+(21000*2.57710)=            ( P/A,i=8%,n=3)

7119.10

Project B

NPV=-276000+(61000*6.62288)=           (P/A,i=8%, n=6)

127995.68

As both bring POSITIVE NPVs ,(ie. Adds value to the firm) & are independent , ie. Selection of one does not preclude the selection of the other, BOTH can be selected---- subject to availability of funds.