Question

1.       A firm is considering four possible independent project options. Project A has a present value cost of $9,000 and yields benefits of $4,280 per year for 4 years. Project B has a present value cost of $10,000 and yields benefits of $4,560 per year for 3 years. Project C has a present value cost of $8,000 and yields benefits of $3,500 per year for 3 years. Project D has a present value cost of $7,500 and yields a benefit of $5,500 per year over 3 years.

Assuming a discount rate of 10%, estimate the following:

a)      Net Present Value (NPV) of the four projects

b)      Discounted Benefit-Cost Ratio for the four projects

c)      Net discounted Benefit-Cost Ratio for the four projects

d)      Rank projects using the NPV criteria

e)      Rank projects using the Benefit-cost ratio

f)       Explain why the two criteria do not give the same ranking

Answer 1

Year	Project-A	Project-B	Project-C	Project-D		PV factor @ 10%	Present values-A	Present values-B	Present values-C	Present values-D
0	(9,000)	(10,000)	(8,000)	(7,500)		1.000	(9,000)	(10,000)	(8,000)	(7,500)
1	4,280	4,560	3,500	5,500		0.909	3,891	4,145	3,182	5,000
2	4,280	4,560	3,500	5,500		0.826	3,537	3,769	2,893	4,545
3	4,280	4,560	3,500	5,500		0.751	3,216	3,426	2,630	4,132
4	4,280					0.683	2,923	-	-	-
							4,567	1,340	704	6,178
						Rank	2	3	4	1
PV of inflows	13,567	11,340	8,704	13,678
PV of outflow	9,000	10,000	8,000	7,500
Benefit cost ratio=	1.507	1.134	1.088	1.824
Rank	2	3	4	1
Ranks are same in both methods