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Phoenix Company can invest in each of three cheese-making projects: C1, C2, and C3. Each project...

Phoenix Company can invest in each of three cheese-making projects: C1, C2, and C3. Each project requires an initial investment of $282,000 and would yield the following annual cash flows. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

C1 C2 C3
Year 1 $ 30,000 $ 114,000 $ 198,000
Year 2 126,000 114,000 78,000
Year 3 186,000 114,000 66,000
Totals $ 342,000 $ 342,000 $ 342,000


(1) Assume that the company requires a 9% return from its investments. Using net present value, determine which projects, if any, should be acquired. (Negative net present values should be indicated with a minus sign. Round your answers to the nearest whole dollar.)

Phoenix Company can invest in each of three cheese-making projects: C1, C2, and C3. Each project requires an initial investment of $282,000 and would yield the following annual cash flows. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

C1 C2 C3
Year 1 $ 30,000 $ 114,000 $ 198,000
Year 2 126,000 114,000 78,000
Year 3 186,000 114,000 66,000
Totals $ 342,000 $ 342,000 $ 342,000


(1) Assume that the company requires a 9% return from its investments. Using net present value, determine which projects, if any, should be acquired. (Negative net present values should be indicated with a minus sign. Round your answers to the nearest whole dollar.)

Solutions

Expert Solution

Calculation of net present value of project C1

Year Cash flow (i) Present value factor (9%,n) (ii) Present value of cash inflows (i) x (ii)
1 30,000 0.917 27,510
2 126,000 0.842 106,092
3 186,000 0.772 143,592
$277,194

Net present value = Present value of cash inflows - Present value of cash outflows

= 277,194 - 282,000

= -$4,806

Calculation of net present value of project C2

Year Cash flow (i) Present value factor (9%,n) (ii) Present value of cash inflows (i) x (ii)
1 114,000 0.917 104,538
2 114,000 0.842 95,988
3 114,000 0.772 88,008
$288,534

Net present value = Present value of cash inflows - Present value of cash outflows

= 288,534 - 282,000

= $6,534

Calculation of net present value of project C3

Year Cash flow (i) Present value factor (9%,n) (ii) Present value of cash inflows (i) x (ii)
1 198,000 0.917 181,566
2 78,000 0.842 65,676
3 66,000 0.772 50,952
$298,194

Net present value = Present value of cash inflows - Present value of cash outflows

= 298,194 - 282,000

= $16,194

Since projects C2 and C3 have positive net present values, hence projects C2 and C3 can be undertaken. If only one project is to be selected, then project C3 should be selected since net present value of project C3 is highest.

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ekkarill92 answered 2 years ago
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