Question

Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Project E					Project H
($19,000 Investment)					($19,000 Investment)
Year	Cash Flow				Year	Cash Flow
1	$	4,000			1	$	15,000
2		5,000			2		4,000
3		6,000			3		3,000
4		13,000

a. Determine the net present value of the projects based on a zero percent discount rate.

b. Determine the net present value of the projects based on a discount rate of 10 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)

Answer 1

a

Project E
Discount rate	0
Year	0	1	2	3	4
Cash flow stream	-19000	4000	5000	6000	13000
Discounting factor	1	1	1	1	1
Discounted cash flows project	-19000	4000	5000	6000	13000
NPV = Sum of discounted cash flows
NPV Project E =	9000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Project H
Discount rate	0
Year	0	1	2	3
Cash flow stream	-19000	15000	4000	3000
Discounting factor	1	1	1	1
Discounted cash flows project	-19000	15000	4000	3000
NPV = Sum of discounted cash flows
NPV Project H =	3000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

b

Project E
Discount rate	0.1
Year	0	1	2	3	4
Cash flow stream	-19000	4000	5000	6000	13000
Discounting factor	1	1.1	1.21	1.331	1.4641
Discounted cash flows project	-19000	3636.364	4132.231	4507.889	8879.1749
NPV = Sum of discounted cash flows
NPV Project E =	2155.66
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Project H
Discount rate	0.1
Year	0	1	2	3
Cash flow stream	-19000	15000	4000	3000
Discounting factor	1	1.1	1.21	1.331
Discounted cash flows project	-19000	13636.36	3305.785	2253.944
NPV = Sum of discounted cash flows
NPV Project H =	196.09
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor