Question

Carlyle Inc. is considering two mutually exclusive projects. Both require an initial investment of $15,000 at t = 0. Project S has an expected life of 2 years with after-tax cash inflows of $7,000 and $12,000 at the end of Years 1 and 2, respectively. Project L has an expected life of 4 years with after-tax cash inflows of $5,200 at the end of each of the next 4 years. Each project has a WACC of 9.00%, and neither can be repeated. The controller prefers Project S, but the CFO prefers Project L. How much value will the firm gain or lose if Project L is selected over Project S, i.e., what is the value of NPVL - NPVS?

		$324.37
		$262.74
		$291.93
		$392.48
		$356.80

Answer 1

NPV = PV of Cash Inflows - PV of Cash Outflows

Project S:

Year	CF	PVF @9%	Disc CF
0	$ -15,000.00	1.0000	$ -15,000.00
1	$    7,000.00	0.9174	$      6,422.02
2	$ 12,000.00	0.8417	$    10,100.16
NPV			$      1,522.18

Project L:

Year	CF	PVF @9%	Disc CF
0	$ -15,000.00	1.0000	$ -15,000.00
1	$    5,200.00	0.9174	$      4,770.64
2	$    5,200.00	0.8417	$      4,376.74
3	$    5,200.00	0.7722	$      4,015.35
4	$    5,200.00	0.7084	$      3,683.81
NPV			$      1,846.55

NPVL - NPVS

= $ 1846.55 - $ 1522.18

= $ 324.37

Option A is correct