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Projects SS and LL have the cash flows shown below. If a 10% cost of capital...

Projects SS and LL have the cash flows shown below. If a 10% cost of capital is appropriate for both of them, what are their NPVs?  
0 1 2 3
SS -700 500 300 100
LL -700 100 300 600

What project or set of projects would be in your capital budget if SS and LL were independent?

Solutions

Expert Solution

Project SS

Net present value is calculated using a financial calculator by inputting the below:

  • Press the CF button.
  • CF0= -$700. It is entered with a negative sign since it is a cash outflow.
  • Cash flow for each year should be entered.
  • Press Enter and down arrow after inputting each cash flow.
  • After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 10%.
  • Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $77.61.

Project LL

Net present value is calculated using a financial calculator by inputting the below:

  • Press the CF button.
  • CF0= -$700. It is entered with a negative sign since it is a cash outflow.
  • Cash flow for each year should be entered.
  • Press Enter and down arrow after inputting each cash flow.
  • After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 10%.
  • Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $89.63.

If projects SS and LL were independent, both the projects would be in the capital budget since the projects have generated a positive net present value.

In case of any query, kindly comment on the solution.

jeff jeffy answered 5 months ago
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