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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


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