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Justin Beaver (JB) is evaluating 2 investment options, project 1 (P1) or project 2 (P2), both...

Justin Beaver (JB) is evaluating 2 investment options, project 1 (P1) or project 2 (P2), both giving the same amount of positive NPV. The following annual cash flows are expected, and JB expects 10% return from each investment. Each project requires an initial investment in Year 0, and JB has a limited investment fund.

Which project JB should choose and why?

Year 1 2 3

Question 10:

Cash Flow (P1) $6,000

6,000 6,000

Cash Flow (P2) $5,000

7,000 6,000

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Homework Answers

Answer #1

npv of P1: (present value of cashflows @ 10% discounte rate)

6000/(1+10%) +6000/(1+10%)^2 +6000/(1+10%)^3 =14921;

npv of P2: (present value of cashflows @ 10% discounte rate)

5000/(1+10%) +7000/(1+10%)^2 +6000/(1+10%)^3 =14838

ie: npv calculated at a discount rate of 10% for Project 1 is greater than Project 2

----Hence Project 1 should be considered as npv is high( even though total cashflows are same, discounted value of cashflows to the present year is higher for project 1)

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