Proposal X Proposal Y Required investment &nbs

Proposal X Proposal Y

Required investment $2,400,000 $3,000,000

Estimated life 10 years 10 years

Estimated residual value $200,000 $200,000

Estimated annual net cash flows $450,000 $580,000

Required rate of return 14% 14%

Which proposal is the better investment.

Expert Solution


Proposal X
Discount rate	0.14
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-2400000	450000	450000	450000	450000	450000	450000	450000	450000	450000	650000
Discounting factor	1	1.14	1.2996	1.481544	1.6889602	1.925415	2.194973	2.502269	2.852586	3.251949	3.707221
Discounted cash flows project	-2400000	394736.8	346260.4	303737.2	266436.12	233715.9	205013.9	179836.8	157751.6	138378.6	175333.5
NPV = Sum of discounted cash flows
NPV Proposal X =	1200.8
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor




Proposal Y
Discount rate	0.14
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-3000000	580000	580000	580000	580000	580000	580000	580000	580000	580000	780000
Discounting factor	1	1.14	1.2996	1.481544	1.6889602	1.925415	2.194973	2.502269	2.852586	3.251949	3.707221
Discounted cash flows project	-3000000	508771.9	446291.2	391483.5	343406.56	301233.8	264240.2	231789.6	203324.3	178354.6	210400.2
NPV = Sum of discounted cash flows
NPV Proposal Y =	79295.84
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Choose proposal Y as it has higher NPV

jeff jeffy answered 3 months ago

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