Question

Use the following information for Questions 23-24:

You are the manager of Lobo Corporation and you must decide between two mutually exclusive projects.The following information is available for the projects:

	Project A	Project B
Annual Revenues	985,000	725,000
Annual Operating Costs	360,000	400,000
Initial Investment	1,800,000	800,000
Salvage Value	-	-
Project Life	5	5
NPV	???	497,725
IRR	0.22	0.3

Required:

Compute the NPV for Project A.

Answer 1

Net present value (NPV) calculation :-

net present value for project A is as follows :-

Particulars	Amounts ($)
Annual revenues	985000
Less :- Annual operating costs	(360000)
Net annual revenues	625000
Initial investments	1800000
Project life	5
Internal rate of return	0.22
Salavage value	0

NPV

Particulars	Amount ($)	calculation	Amount ($)
Initial investment			(1800000)
Add :- net annual revenues (year -1)	625000	(625000 ÷ 1+0.22)1	512295
Add :- net annual revenues (year 2)	625000	625000 ÷ (1+0.22)2	419914
Add :- net annual revenues (year 3)	625000	625000 ÷ (1+0.22)3	344192
Add :- net annual revenues (year 4)	625000	625000 ÷ (1+0.22)4	282124
Add :- net annual revenues (year 5)	625000	625000 ÷ (1+0.22)5	231250
Add :- salvage value	0	0
Net present value			(10225)

The NPV of the net project A is -$10225

These are all the information required to solve the given question.

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