Question

As a Division Manager you have $250,000 to invest in a new project. The Maverick Project Teams says that if you invest with them the company will receive returns of $70,000 after a year, $120,000 after two years and $120,000 after three years. The Bull Project Team says that if you invest with them the company will receive nothing for the first two years and then $370,000 at the end of the third year. The current annual discount rate is 6%. Create a worksheet that determines which project team offers the better financial return on the investment.

Answer 1

Maverik project team
	a	b	a*b
Year	Cashflow	PV factor 6% [1/(1+r)]^n	PV
0	(250,000.00)	1.000	(250,000.00)
1	70,000.00	0.943	66,037.74
2	120,000.00	0.890	106,799.57
3	120,000.00	0.840	100,754.31
NPV of the project			23,591.62

Bull project team
	a	b	a*b
Year	Cashflow	PV factor 6% [1/(1+r)]^n	PV
0	(250,000.00)	1.000	(250,000.00)
1	-	0.943	-
2	-	0.890	-
3	370,000.00	0.840	310,659.13
NPV of the project			60,659.13

Conclusion

NPV of bull project team is higher than maverik project team

So company should go with bull project team

Notes:

NPV = Discounted inflow - Initial investment

Rate of return is 6%