Question

A firm is evaluating two mutually exclusive projects that have unequal lives. The firm must evaluate the projects using the annualized net present value approach and recommend which project they should select.-- Calculate and make decision base on the following. The firm's cost of capital has been determined to be 18 percent, and the projects have the following initial investments and cash flows:

		Project W	Project Y
Initial Investment		40,000	58,000
cash flow	1	20,000	30,000
	2	20,000	35,000
	3	20,000	40,000
	4	20,000
	5	20,000

Answer 1

Based on the given information, pls find below steps, wworkings and answer:

The NPV of Project W is 22543.42 and Project Y is 16905.42; However, since the lives of the Projects are different the Equivalent Annual Values are computed using the given formula; Based on this, EAV of Proejct W is 7208.89 and that of Project Y is 7775.21;

Hence, the Project with higher EAV - Proejct Y is recommended for investment.

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;