Question

Big Spenders Inc

Big Spenders Inc. has been working on diversifying its portfolio of investments and requires accounting advice for a decision between two car cleaning and detailing companies. Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial investment Cleaning $3,000 and Detailing $3,200.

Compute the present value of the cash inflows for each investment using an 8% discount rate for Cleaning and 10% for Detailing.

Year	Cleaning	Detailing	Discount Factor 8%	Discount Factor 10%
1	$500	2,000	0.9259	0.9091
2	1,000	1,500	0.8573	0.8264
3	1,500	1,000	0.7938	0.7513
4	2,000	5,00	0.7350	0.6830
Total	$5,000	$5,000	0.6806	0.6209

First you have to explain what Net present value and payback are to your clients and what their differences are. Also, you need to give your recommendation of which project they should move forward with based on your quantitative analysis.

Answer 1

As we can see the NPV of Detailling Project is more than Cleaning Project althoug the amount total receivable is same in both the cases, this is because the amount receivable in Detailing Project is more in starting years.

NPV of Inflow of Detailing Project @8% = 4299.05

NPV of Inflow of Cleaning Project @8% = 3980.95

NPV of Inflow of Detailing Project @10% = 4150.6

NPV of Inflow of Cleaning Project @10% = 3773.9

Hence if we have to choose a project only on Quantitative basis than we should go with Detailing Project although it require $200 more initial investment but its NPV is more than Cleaning Project.

Detailing Project should be selected.