Question

You, the CFO of a large corporation, are evaluating the value of three different investment opportunities:

Project A: We expect this project to yield cash flows of $5 million over the next ten years.

Project B: We expect this project to yield zero cash flows for the first four years but then a $50 million dollar cash flow at the end of the fifth year.

Project C: We expect this project to yield cash flows of $500,000 forever.

If we assume that the rate of return or “r” is 5% for each of these projects, which project (set of cash flows) is worth the most to us TODAY?

Answer 1

Use NPV function in EXCEL to find the Present value

=NPV(rate,Year1 to YearN cashflows)

Project A: =NPV(5%,Year1 to Year10 cashflows)=$38.61 million

Year1	5
Year2	5
Year3	5
Year4	5
Year5	5
Year6	5
Year7	5
Year8	5
Year9	5
Year10	5
Present value	38.61

Project B=50/(1+5%)^5=50/1.276282=$39.18 million

Project C=500,000/5%=10,000,000=$10 million

Project B is worth more today.