Question

A company is evaluating two independent projects for capital investment purposes. If the company has only $85 million to invest, and its required return is 10 percent by how much the company’s value will increase?

All values are in millions.

	Project 1	Project 2
0	-50	-50
1	5	0
2	15	0
3	30	0
4	30	90

		$30.53
		$11.47
		$9.97
		$21.44
		$19.06

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

So, the NPV of Project 1 is computed as follows:

= - $ 50 + $ 5 / 1.10 + $ 15 / 1.10² + $ 30 / 1.10³ + $ 30 / 1.10⁴

= $ 9.97 Approximately

The NPV of Project 2 is computed as follows:

= - $ 50 + $ 90 / 1.10⁴

= $ 11.47 Approximately.

Since the NPV of Project 2 is more than the NPV of Project 1, hence Project 2 shall be accepted as it will add more value to the firm.

So, the correct answer is option of $ 11.47

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