Question

14. 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.

	Project E Project H

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.)

	Project E Project H

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

	ANSWER = A)
	CALCULATION OF THE NET PRESENT VALUE OF THE PROJECT E
	WITH ZERO PERCENTAGE DISCOUNT
	Years	Cash Flows	Present Value
	0	-$54,000	-$54,000
	1	$12,000	-$42,000
	2	$16,000	-$26,000
	3	$26,000	$0
	4	$33,000	$33,000
	CALCULATION OF THE NET PRESENT VALUE OF THE PROJECT H
	WITH ZERO PERCENTAGE DISCOUNT
	Years	Cash Flows	Present Value
	0	-$48,000	-$48,000
	1	$24,000	-$24,000
	2	$17,000	-$7,000
	3	$18,000	$11,000
	Net present value of the project based on zero percentage discount
		Project E =	$33,000
		Project H =	$11,000
	ANSWER = B)
	CALCULATION OF THE NET PRESENT VALUE OF THE PROJECT E
	WITH 11% PERCENTAGE DISCOUNT
	Years	Cash Flows	PVF of $ 1 @ 11%	Present Value
	0	-$54,000	1.00000	-$54,000.00
	1	$12,000	0.90090	$10,810.81
	2	$16,000	0.81162	$12,985.96
	3	$26,000	0.73119	$19,010.98
	4	$33,000	0.65873	$21,738.12
	Total			$10,545.87
	CALCULATION OF THE NET PRESENT VALUE OF THE PROJECT H
	WITH 11% PERCENTAGE DISCOUNT
	Years	Cash Flows	PVF of $ 1 @ 11%	Present Value
	0	-$48,000	1.00000	-$48,000.00
	1	$24,000	0.90090	$21,621.62
	2	$17,000	0.81162	$13,797.58
	3	$18,000	0.73119	$13,161.44
	Total			$580.65
	Net present value of the project based on zero percentage discount
		Project E =	$10,546
		Project H =	$581
	ANSWER = C)
		Answer = Option 3 = Both H & E ( Because the both project have the positive cash flow)