Question
In: Finance
Net present value. Quark Industries has three potential projects, all with an initial cost of $1,800,000....
Net present value. Quark Industries has three potential projects, all with an initial cost of $1,800,000. The capital budget for the year will allow Quark to accept only one of the three projects. Given the discount rate and the future cash flow of each project, determine which project Quark should accept.
Cash Flow Project M Project
N Project O
Year 1 $500,000 $600,000 $1,000,000
Year 2 $500,000 $600,000 $800,000
Year 3 $500,000 $600,000 $600,000
Year 4 $500,000 $600,000 $400,000
Year 5 $500,000 $600,000 $200,000
Discount rate 9% 11% 16%
Which project should Quark accept? (Select the best response.)
A. Project N
B.Project O
C.Project M
D. None of the projects
Solutions
Expert Solution
| Project M | ||||||
| Discount rate | 9.000% | |||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| Cash flow stream | -1800000 | 500000 | 500000 | 500000 | 500000 | 500000 |
| Discounting factor | 1.000 | 1.090 | 1.188 | 1.295 | 1.412 | 1.539 |
| Discounted cash flows project | -1800000.000 | 458715.596 | 420839.997 | 386091.740 | 354212.606 | 324965.693 |
| NPV = Sum of discounted cash flows | ||||||
| NPV Project M = | 144825.63 | |||||
| Where | ||||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
| Discounted Cashflow= | Cash flow stream/discounting factor | |||||
| Project N | ||||||
| Discount rate | 11.000% | |||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| Cash flow stream | -1800000 | 600000 | 600000 | 600000 | 600000 | 600000 |
| Discounting factor | 1.000 | 1.110 | 1.232 | 1.368 | 1.518 | 1.685 |
| Discounted cash flows project | -1800000.000 | 540540.541 | 486973.460 | 438714.829 | 395238.584 | 356070.797 |
| NPV = Sum of discounted cash flows | ||||||
| NPV Project N = | 417538.21 | |||||
| Where | ||||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
| Discounted Cashflow= | Cash flow stream/discounting factor | |||||
| Project O | ||||||
| Discount rate | 16.000% | |||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| Cash flow stream | -1800000 | 1000000 | 800000 | 600000 | 400000 | 200000 |
| Discounting factor | 1.000 | 1.160 | 1.346 | 1.561 | 1.811 | 2.100 |
| Discounted cash flows project | -1800000.000 | 862068.966 | 594530.321 | 384394.604 | 220916.439 | 95222.603 |
| NPV = Sum of discounted cash flows | ||||||
| NPV Project O = | 357132.93 | |||||
| Where | ||||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
| Discounted Cashflow= | Cash flow stream/discounting factor | |||||
Accept project N as it has highest NPV
jeff jeffy answered 2 years agoRelated Solutions
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What is the net present value of this
investment?
INITIAL
COST $500,000
PROJECT
LIFE 15
years
SALVAGE
VALUE $
20,000
ANNUAL NET CASH
FLOWS $120,000
DISCOUNT
RATE 15
%
a. $
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