Question

Your company is considering investing in one of two mutually exclusive projects. The cost of capital is 11%. The first project Has $25,000 annual cash inflows, a 10-year life, and will cost $120,000 at time zero. The second project has a 7-year life, Annual cash inflows of $20,000 per year, and a cost of $75,000 at time zero. Which project has the highest NPV. Assuming that these projects will most likely be repeated indefinitely into the future, which project would add the most value to the company? Justify your answer using the EAA

Answer 1

First Project
Annual Cash Flow	25000
Life	10 Years
Cost	120000
		Amounts in $
SO	Year	Cash Flow	PVF@ 11%	Discounted Value
	0	(120,000)	1.00	(120,000)
	1-10	25,000	5.89	147,230
		NPV		27,230
Second Project
Annual Cash Flow	20000
Life	7 Years
Cost	75000
		Amounts in $
SO	Year	Cash Flow	PVF@ 11%	Discounted Value
	0	(75,000)	1.00	(75,000)
	1-10	20,000	4.71	94,244
		NPV		19,244
Project One will give has the Highest NPV
Project one will give most value to the company