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
($54,000 Investment)					($48,000 Investment)
Year	Cash Flow				Year	Cash Flow
1	$	12,000			1	$	24,000
2		16,000			2		17,000
3		26,000			3		18,000
4		33,000

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 11 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)

c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 11 percent?

• Project E

• Project H

• Both H and E

Answer 1

a.Project E

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$54,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 0%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $33,000.

Project E

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$48,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 0%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $11,000.

b. Project E

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$54,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 11%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $10,545.87.

Project E

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$48,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 11%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $580.65.

Since the projects are not mutually exclusive, both the projects should be accepted since both have a positive net present value.

In case of any query, kindly comment on the solution