Question

Question3.

Suppose you are working a financial manager at one of the investment corporations, if there were two investment opportunities require the same size of the investments (250,000 Saudi Riyals), and the level of risk is close, the cash flows for each project is shown in the following table:

year

year	Project 1	Project 2
	Cash flow	Cash flow
1	100,000	25,000
2	175,000	75,000
2	150,000	150,000
4	75,000	250,000

1. Calculate the net present value for each project?
2. Which project would you select? and why? (assume that the interest rate is 10%).

Answer 1

Calculating the Net Present Value for each project:

Year	Cash Flows Project 1 ($)	Cash Flows Project 2 ($)	PV Factor @10%	Present Value Project 1 ($)	Present Value Project 2 ($)
0	(250,000.00)	(250,000.00)	1.0000	(250,000.00)	(250,000.00)
1	100,000.00	25,000.00	0.9091	90,909.09	22,727.27
2	175,000.00	75,000.00	0.8264	144,628.10	61,983.47
3	150,000.00	150,000.00	0.7513	112,697.22	112,697.22
4	75,000.00	250,000.00	0.6830	51,226.01	170,753.36
			NPV	98,234.41	118,161.33

NPV of Project 1 = $ 98,234.41

NPV of Project 2 = $ 118,161.33

As, Project 2 provides higher NPV of $ 118,161.33 it should be choosen.

Note- In Question, year of Cash flow after 1st,2nd, instead of 3rd, 2nd is mentioned. Assuming it to be Writting.

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