Question

Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial cash outflow is $50,000 for each project. Project A results in cash inflows of $15,625 at the end of each of the next five years. Project B results in one cash inflow of $99,500 at the end of the fifth year. The required rate of return of Ace Inc. is 10 percent. Ace Inc. should invest in:

a.Project B because it has no cash inflows in the first four years of its life.

b.Project B because it has a higher net present value (NPV).

c.Project A because it will yield cash every year for five years.

d.Project A because it has a positive net present value (NPV).

e.Project A because it will generate cash in the initial years of its life.

(PLEASE SHOW ME STEP BY STEP HOW TO DO THIS CALCULATION ON FINANCE CALCULATOR. THANK YOU)

Answer #1

NPV of Project A: | ||||

Year | Cashflows | PVF at 10% | Present value | |

0 | -50000 | 1 | -50000 | |

1 | 15625 | 0.909091 | 14204.55 | |

2 | 15625 | 0.826446 | 12913.22 | |

3 | 15625 | 0.751315 | 11739.29 | |

4 | 15625 | 0.683013 | 10672.09 | |

5 | 15625 | 0.620921 | 9701.896 | |

Net present value of A | 9231 | |||

NPV of Project B | ||||

Year | Cashflows | PVF at 10% | Present value | |

0 | -50000 | 1 | -50000 | |

1 | 0 | 0.909091 | 0 | |

2 | 0 | 0.826446 | 0 | |

3 | 0 | 0.751315 | 0 | |

4 | 0 | 0.683013 | 0 | |

5 | 99500 | 0.620921 | 61781.67 | |

Net Present value of B | 11781.67 | |||

Answer is b. Project B because it has a higher NPV |

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