Question

Project A requires an original investment of $54,200. The project will yield cash flows of $14,800 per year for seven years. Project B has a calculated net present value of $2,690 over a four year life. Project A could be sold at the end of four years for a price of $19,100.

Below is a table for the present value of $1 at Compound interest.

Year	6%	10%	12%
1	0.943	0.909	0.893
2	0.890	0.826	0.797
3	0.840	0.751	0.712
4	0.792	0.683	0.636
5	0.747	0.621	0.567

Below is a table for the present value of an annuity of $1 at compound interest.

Year	6%	10%	12%
1	0.943	0.909	0.893
2	1.833	1.736	1.690
3	2.673	2.487	2.402
4	3.465	3.170	3.037
5	4.212	3.791	3.605

(a) Using the present value tables above, determine the net present value of Project A over a four-year life with salvage value assuming a minimum rate of return of 12%. Round your answer to two decimal places.
$

(b) Which project provides the greatest net present value?

Answer 1

Requirement a

Net present value of Project A = $2,910

Requirement b

Project A has higher Net present value

Working

Project A
Year	Cash Flows	PV Factor @12%	Discounted cash flow
0	$       (54,200.00)	1.0000	$        (54,200.00)
1	$          14,800.00	0.893	$                 13,216
2	$          14,800.00	0.797	$                 11,796
3	$          14,800.00	0.712	$                 10,538
4	$          14,800.00	0.636	$                   9,413
4	$          19,100.00	0.636	$                 12,148
Net Present Value			$             2,910