Question

Star Computer Services has the following three investment projects available this year.

The firm's cost of capital is 7 %.

Project	X	Y	Z
Initial cost	–$20,000	–$30,000	–$30,000
Year 1 CF	10,000	15,000	12,000
Year 2 CF	11,000	14,000	13,000
Year 3 CF	12,000	13,000	14,000
Year 4 CF	13,000	12,000	15,000

a.	Which projects are acceptable? Why?
b.	What is your decision if the projects are mutually exclusive?

Answer 1

NPV = PV of Cash Inflows - PV of Cash Outflows

Part A:

Project X:

Year	CF	PVF @7%	Disc CF
0	$ -20,000.00	1.0000	$ -20,000.00
1	$ 10,000.00	0.9346	$    9,345.79
2	$ 11,000.00	0.8734	$    9,607.83
3	$ 12,000.00	0.8163	$    9,795.57
4	$ 13,000.00	0.7629	$    9,917.64
NPV			$ 18,666.83

Project Y:

Year	CF	PVF @7%	Disc CF
0	$ -30,000.00	1.0000	$ -30,000.00
1	$ 15,000.00	0.9346	$ 14,018.69
2	$ 14,000.00	0.8734	$ 12,228.14
3	$ 13,000.00	0.8163	$ 10,611.87
4	$ 12,000.00	0.7629	$    9,154.74
NPV			$ 16,013.45

Project Z:

Year	CF	PVF @7%	Disc CF
0	$ -30,000.00	1.0000	$ -30,000.00
1	$    12,000.00	0.9346	$ 11,214.95
2	$    13,000.00	0.8734	$ 11,354.70
3	$    14,000.00	0.8163	$ 11,428.17
4	$    15,000.00	0.7629	$ 11,443.43
NPV			$ 15,441.26

If Projects are not mutually exclusive, all Projects can be selected.

Part B:

If Projects are mutually exclsuive, Select the Project with higher NPV.

Project A is selected.