Question

In: Accounting

Labeau Products, Ltd., of Perth, Australia, has $12,000 to invest. The company is trying to decide...

Labeau Products, Ltd., of Perth, Australia, has $12,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:

Invest in
Project X
Invest in
Project Y
Investment required $ 12,000 $ 12,000
Annual cash inflows $ 4,000
Single cash inflow at the end of 6 years $ 28,000
Life of the project 6 years 6 years

The company’s discount rate is 16%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Compute the net present value of Project X.

2. Compute the net present value of Project Y.

3. Which project would you recommend the company accept?

Solutions

Expert Solution

Note - in Exhibit 13B-1 and Exhibit 13B-2 table, Factor values are given upto 3 decimals so i have used it. Answer may be differ if used values upto 4 or 5 decimals.

1. Calculation of Net Present Value of Project X

Initial Investment = $12,000

Annual Cash Inflow = $4,000

Present Value Annuity Factor @16% for 6 Years, PVAF(6, 16%) = 3.685

Present Value (PV) of Cash Inflow = PVAF(6, 16%) x Annual Cash Inflow
                                                               = 3.685 x $4,000
                                   = $14740

Net Present Value of Project X = Present Value of Cash Inflow – Initial Investment
                   = $14740 – 12,000
                                                              = $2740

          

2. Calculation of Net Present Value of Project Y

Initial Cash Outflow = $12,000

Cash Inflow at the end of 6 Year = $28,000

Present Value @16% of 6th year, PVF(6, 16%) = 0.410

Present Value of Cash Inflow = PVF(6, 16%) * Cash Inflow at end of 6th year
                                                     = 0.410 * $28,000
                                                     = $11,480

Net Present Value of Project Y = Present Value of Cash Inflow – Initial Investment
                   = $11,480 – 12,000
                                                              = ($520)

NPV of Project Y = ($520)

C)

As Project X have povitive Net Present Value, so Project X should be Accepted


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