Question

1. A company with a cost of capital of 15% is choosing between the projects A and B. The cash flows for the corresponding projects are given below:

   year	A	B
   0	-50,000	-30,000
   1	15,000	5,000
   2	15,000	6,000
   3	10,000	15,000
   4	15,000	3,000
   5	20,000	5,000
   6	15,000	10,000
   7	17,000	15,000
   8	12,000	12,000
   9	10,000	5,000
   10	10,000	5,000

   a. What is the NPV of each project?

b.  Based on the above calculations please decide which project is better?

Answer 1

NPV = -initital investment + PV of future cash flows

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

a)

NPV of A

= -50000 + 15000/1.15 + 15000/1.15^2 + 10000/1.15^3 + 15000/1.15^4 + 20000/1.15^5 + 15000/1.15^6 + 17000/1.15^7 + 12000/1.15^8 + 10000/1.15^9 + 10000/1.15^10

= 21593.77

NPV of B

= -30000 + 5000/1.15 + 6000/1.15^2 + 15000/1.15^3 + 3000/1.15^4 + 5000/1.15^5 + 10000/1.15^6 + 15000/1.15^7 + 12000/1.15^8 + 5000/1.15^9 + 5000/1.15^10

= 9490.96

b)

Since NPV of A is greater than NPV of B , project A is better