In: Finance
(Risk-adjusted NPV) The Hokie Corporation is considering two mutually exclusive projects. Both require an initial outlay of $13,000 and will operate for 9 years. Project A will produce expected cash flows of $5,000 per year for years 1 through 9, whereas project B will produce expected cash flows of $6,000 per year for years 1 through 9. Because project B is the riskier of the two projects, the management of Hokie Corporation has decided to apply a required rate of return of 15 percent to its evaluation but only a required rate of return 9 percent to project A. Determine each project's risk-adjusted net present value.
What is the risk-adjusted NPV of project A?
$______ (Round to the nearest cent.)
What is the risk-adjusted NPV of project B?
$______ (Round to the nearest cent.)
The risk-adjusted NPV of PROJECT-A
Year |
Annual Cash Flow ($) |
Present Value factor at 9% |
Present Value of Cash Flow ($) |
1 |
5,000 |
0.917431 |
4,587.16 |
2 |
5,000 |
0.841680 |
4,208.40 |
3 |
5,000 |
0.772183 |
3,860.92 |
4 |
5,000 |
0.708425 |
3,542.13 |
5 |
5,000 |
0.649931 |
3,249.66 |
6 |
5,000 |
0.596267 |
2,981.34 |
7 |
5,000 |
0.547034 |
2,735.17 |
8 |
5,000 |
0.501866 |
2,509.33 |
9 |
5,000 |
0.460428 |
2,302.14 |
TOTAL |
29,976.23 |
||
Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment
= $29,976.23 - $13,000
= $16,976.23
The risk-adjusted NPV of PROJECT-B
Year |
Annual Cash Flow ($) |
Present Value factor at 15% |
Present Value of Cash Flow ($) |
1 |
6,000 |
0.869565 |
5,217.39 |
2 |
6,000 |
0.756144 |
4,536.86 |
3 |
6,000 |
0.657516 |
3,945.10 |
4 |
6,000 |
0.571753 |
3,430.52 |
5 |
6,000 |
0.497177 |
2,983.06 |
6 |
6,000 |
0.432328 |
2,593.97 |
7 |
6,000 |
0.375937 |
2,255.62 |
8 |
6,000 |
0.326902 |
1,961.41 |
9 |
6,000 |
0.284262 |
1,705.57 |
TOTAL |
28,629.50 |
||
Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment
= $28,629.50 - $13,000
= $15,629.50
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.