Keller Construction is considering two new investments. Project
E calls for the purchase of earthmoving equipment. Project H
represents an investment in a hydraulic lift. Keller wishes to use
a net present value profile in comparing the projects. The
investment and cash flow patterns are as follows: Use Appendix B
for an approximate answer but calculate your final answer using the
formula and financial calculator methods.
| Project E | Project H | |||||||
| ($41,000 Investment) | ($42,000 Investment) | |||||||
| Year | Cash Flow | Year | Cash Flow | |||||
| 1 | $ | 11,000 | 1 | $ | 23,000 | |||
| 2 | 16,000 | 2 | 17,000 | |||||
| 3 | 22,000 | 3 | 15,000 | |||||
| 4 | 24,000 | |||||||
a. Determine the net present value of the projects
based on a zero percent discount rate.
Project E _________
Project H ________
b. Determine the net present value of the projects
based on a discount rate of 9 percent. (Do not round
intermediate calculations and round your answers to 2 decimal
places.)
Project E _________
Project H ________
a.
E:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=11000+16000+22000+24000
=$73000
NPV=Present value of inflows-Present value of outflows
=$73000-$41000
=$32000
H:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=23000+17000+15000
=$55000
NPV=Present value of inflows-Present value of outflows
=$55000-$42000
=$13000
b.
E:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=11000/1.09+16000/1.09^2+22000/1.09^3+24000/1.09^4
=$57548.86
NPV=Present value of inflows-Present value of outflows
=$57548.86-$41000
=$16548.86(Approx).
H:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=23000/1.09+17000/1.09^2+15000/1.09^3
=$46992.23
NPV=Present value of inflows-Present value of outflows
=$46992.23-$42000
=$4992.23(Approx).
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