Question

INTEL Plc is comparing two mutually exclusive projects, whose details are given below.  The company’s cost of capital is 12 per cent

Year	Project A ($'000)	Project  B ($’000)
0	(150)	(152)
1	30	40
2	25	35
3	30	30
4	35	27
5	40	25

Required:

1. Using the net present value method, which project should be accepted?

Answer 1

Answer:

Calculation of net present value of Project A & project B:

Project A

Particulars	Period	PV Factor	Amount	Present Value
Cash Inflow:
Cash inflow for the year -1	1	0.893	30,000	$26,790
Cash inflow for the year -2	2	0.797	25,000	$19,925
Cash inflow for the year -3	3	0.712	30,000	$21,360
Cash inflow for the year -4	4	0.636	35,000	$22,260
Cash inflow for the year -5	5	0.567	40,000	$22,680
Total cash inflow (a)				$113,015
Cash Outflow:
Initial investment	0	1	$150,000	$150,000
Total cash outflow (b)				$150,000
Net Present Value (a-b)				($36,985)

Project B

Particulars	Period	PV Factor	Amount	Present Value
Cash Inflow:
Cash inflow for the year -1	1	0.893	$40,000	$35,720
Cash inflow for the year -2	2	0.797	$35,000	$27,895
Cash inflow for the year -3	3	0.712	$30,000	$21,360
Cash inflow for the year -4	4	0.636	$27,000	$17,172
Cash inflow for the year -5	5	0.567	$25,000	$14,175
Total cash inflow (a)				$116,322
Cash Outflow:
Initial investment	0	1	$152,000	$152,000
Total cash outflow (b)				$152,000
Net Present Value (a-b)				($35,678)

Decision: As the net present value of both the project is negative & therefore, using the net present value method, project B should be selected as it's net present value is more than project A.