Question

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 ($43,000 Investment) ($39,000 Investment) Year Cash Flow Year Cash Flow 1 $ 13,000 1 $ 19,000 2 16,000 2 17,000 3 19,000 3 13,000 4 26,000 a. Determine the net present value of the projects based on a zero percent discount rate. b. Determine the net present value of the projects based on a discount rate of 9 percent.

Answer 1

Project E

Discount rate	0.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(43,000.00)	0	(43,000.00)	(43,000.00)
13,000.000	1	13,000.00	(30,000.00)
16,000.000	2	16,000.00	(14,000.00)
19,000.000	3	19,000.00	5,000.00
26,000.000	4	26,000.00	31,000.00

NPV at 0% = 31,000

Discount rate	9.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(43,000.00)	0	(43,000.00)	(43,000.00)
13,000.000	1	11,926.61	(31,073.39)
16,000.000	2	13,466.88	(17,606.51)
19,000.000	3	14,671.49	(2,935.03)
26,000.000	4	18,419.06	15,484.03

NPV at 9% = 15,484.03

Project H:

Discount rate	0.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(39,000.00)	0	(39,000.00)	(39,000.00)
19,000.000	1	19,000.00	(20,000.00)
17,000.000	2	17,000.00	(3,000.00)
13,000.000	3	13,000.00	10,000.00

NPV at 0% = 10,000

Discount rate	9.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(39,000.00)	0	(39,000.00)	(39,000.00)
19,000.000	1	17,431.19	(21,568.81)
17,000.000	2	14,308.56	(7,260.25)
13,000.000	3	10,038.39	2,778.14

NPV at 9% = 2,778.14