Question

There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $34,000 and is expected to generate the following cash flows:

	First Year	Second Year	Third Year	Total
Alpha Project	$32,500	$22,000	$5,500	$60,000
Beta Project	8,000	23,000	28,000	59,000

(Click here to see present value and future value tables)

A. If the discount rate is 10%, compute the NPV of each project. Round your present value factor to three decimal places and final answer to answer to 2 decimal places.

Alpha Project	$
Beta Project	$

B. Which project should be recommended.

Alpha .

Answer 1

Answer:

A. Determination of NPV of each project if the discount rate is 10%:

Alpha Project

Particulars	Period	PV Factor	Amount	Present Value
Inflow:
Cash flow in year-1	1	0.909	$32,500	$29,542.50
Cash flow in Year-2	2	0.826	$22,000	$18,172
Cash flow in Year-3	3	0.751	$5,500	$4130.50
Total Cash Inflow (a)				$51,845
Outflow:
Initial Investment	0	1	$34,000	$34,000
Total Cash Outflow (b)				$34,000
Net Present Value (a-b)				$17,845

Beta Project

Particulars	Period	PV Factor	Amount	Present Value
Inflow:
Cash flow in year-1	1	0.909	$8,000	$7,272
Cash flow in Year-2	2	0.826	$23,000	$18,998
Cash flow in Year-3	3	0.751	$28,000	$21,028
Total Cash Inflow (a)				$47,298
Outflow:
Initial Investment	0	1	$34,000	$34,000
Total Cash Outflow (b)				$34,000
Net Present Value (a-b)				$13,298

B. Project Alpha should be recommended as NPV of alpha is more than the Beta project.