Question

Consider the following two projects:

Project	Year 0 Cash Flow	Year 1 Cash Flow	Year 2 Cash Flow	Year 3 Cash Flow	Year 4 Cash Flow	Discount Rate
A	-100	40	50	60	N/A	.15
B	-73	30	30	30	30	.15

Calculate the NPV of both projects. Which project would you accept?

If interest rates are now down to 13%, what are the new NPVs?

Answer 1

NPV at 15%		project A		Project B
Year	PVF at 15%	Cashflows	PV of CF	Cashflows	PV of CF
0	1	-100	-100	-73	-73
1	0.869565	40	34.78261	30	26.08696
2	0.756144	50	37.80718	30	22.68431
3	0.657516	60	39.45097	30	19.72549
4	0.571753	0	0	30	17.1526
NPV at 15%			12.04		12.65
NPV at 13%		project A		Project B
Year	PVF at 13%	Cashflows	PV of CF	Cashflows	PV of CF
0	1	-100	-100	-73	-73
1	0.884956	40	35.39823	30	26.54867
2	0.783147	50	39.15733	30	23.4944
3	0.69305	60	41.58301	30	20.7915
4	0.613319	0	0	30	18.39956
NPV at 13%			16.14		16.23