Question

The following are the cash flows of two projects:

Year	Project A	Project B
0	−$330	−$330
1	160	230
2	160	230
3	160	230
4	160

a.	Calculate the NPV for both projects if the opportunity cost of capital is 17%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project	NPV
A	$
B

b.	Suppose that you can choose only one of these projects. Which would you choose?
	Project A Project B Neither

Answer 1

Net Present Value (NPV) of PROJECT-A

Period	Annual Cash Flow ($)	Present Value factor at 17%	Present Value of Cash Flow ($)
1	160	0.85470	136.75
2	160	0.73051	116.88
3	160	0.62437	99.90
4	160	0.53365	85.38
TOTAL			438.92

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $438.92 - $330

= $108.92

Net Present Value (NPV) of PROJECT-B

Period	Annual Cash Flow ($)	Present Value factor at 17%	Present Value of Cash Flow ($)
1	230	0.85470	196.58
2	230	0.73051	168.02
3	230	0.62437	143.61
TOTAL			508.20

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $508.20 - $330

= $178.20

(b)-DECISION

“PROJECT-B”. We should choose Project-B, since it has the higher Net Present Value of $178.20.

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.