Question

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The following capital expenditure projects have been proposed for management's consideration at Scott, Inc., for the upcoming budget year: Use Table 6-4 and Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.)

		Project
	Year(s)		A				B				C				D				E
Initial investment	0		$	(59,000	)		$	(68,000	)		$	(136,000	)		$	(136,000	)		$	(272,000	)
Amount of net cash return	1			13,400				0				46,000				13,600				90,000
	2			13,400				0				46,000				27,200				90,000
	3			13,400				29,000				46,000				40,800				45,500
	4			13,400				29,000				46,000				54,400				45,500
	5			13,400				29,000				46,000				68,000				45,500
Per year	6-10			13,400				18,000				0				0				45,500
NPV (18% discount rate)			$	1,221			$	?			$	?			$	?			$	2,155
Present value ratio				1.02				?				?				?				?

Required:

a. Calculate the net present value of projects B, C, and D, using 18% as the cost of capital for Scott, Inc. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.)

Project	Net Present Value
B
C
D

b. Calculate the present value ratio for projects B, C, D, and E. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project	Present Value Ratio
B
C
D
E

Answer 1

Project A
Year	Cash Flows	PV Factor @18%	Discounted cash flow
0	$       (59,000.00)	1.0000	$    (59,000.00)
1	$          13,400.00	0.8475	$      11,355.93
2	$          13,400.00	0.7182	$        9,623.67
3	$          13,400.00	0.6086	$        8,155.65
4	$          13,400.00	0.5158	$        6,911.57
5	$          13,400.00	0.4371	$        5,857.26
6	$          13,400.00	0.3704	$        4,963.78
7	$          13,400.00	0.3139	$        4,206.60
8	$          13,400.00	0.2660	$        3,564.91
9	$          13,400.00	0.2255	$        3,021.11
10	$          13,400.00	0.1911	$        2,560.26
Net Present Value			$        1,220.76
Present value ratio			1.02

Project B
Year	Cash Flows	PV Factor @18%	Discounted cash flow
0	$       (68,000.00)	1.0000	$    (68,000.00)
1	$                         -	0.8475	$                     -
2	$                         -	0.7182	$                     -
3	$          29,000.00	0.6086	$      17,650.30
4	$          29,000.00	0.5158	$      14,957.88
5	$          29,000.00	0.4371	$      12,676.17
6	$          18,000.00	0.3704	$        6,667.77
7	$          18,000.00	0.3139	$        5,650.65
8	$          18,000.00	0.2660	$        4,788.69
9	$          18,000.00	0.2255	$        4,058.21
10	$          18,000.00	0.1911	$        3,439.16
Net Present Value			$        1,888.81
Present value ratio			1.03

Project C
Year	Cash Flows	PV Factor @18%	Discounted cash flow
0	$     (136,000.00)	1.0000	$ (136,000.00)
1	$          46,000.00	0.8475	$      38,983.05
2	$          46,000.00	0.7182	$      33,036.48
3	$          46,000.00	0.6086	$      27,997.02
4	$          46,000.00	0.5158	$      23,726.29
5	$          46,000.00	0.4371	$      20,107.02
6
7
8
9
10
Net Present Value			$        7,849.87
Present value ratio			1.06

Project D
Year	Cash Flows	PV Factor @18%	Discounted cash flow
0	$     (136,000.00)	1.0000	$ (136,000.00)
1	$          13,600.00	0.8475	$      11,525.42
2	$          27,200.00	0.7182	$      19,534.62
3	$         40,800.00	0.6086	$      24,832.14
4	$          54,400.00	0.5158	$      28,058.91
5	$          68,000.00	0.4371	$      29,723.43
6
7
8
9
10
Net Present Value			$    (22,325.48)
Present value ratio			0.84

Project E
Year	Cash Flows	PV Factor @18%	Discounted cash flow
0	$     (272,000.00)	1.0000	$ (272,000.00)
1	$          90,000.00	0.8475	$      76,271.19
2	$          90,000.00	0.7182	$      64,636.60
3	$          45,500.00	0.6086	$      27,692.70
4	$          45,500.00	0.5158	$      23,468.39
5	$          45,500.00	0.4371	$      19,888.47
6	$          45,500.00	0.3704	$      16,854.64
7	$          45,500.00	0.3139	$      14,283.59
8	$          45,500.00	0.2660	$      12,104.74
9	$          45,500.00	0.2255	$      10,258.25
10	$          45,500.00	0.1911	$        8,693.43
Net Present Value			$        2,152.00
Present value ratio			1.01

Project	Net Present Value
B	$            1,888.81
C	$            7,849.87
D	$       -22,325.48

Project	Present Value ratio
B	1.03
C	1.06
D	0.84
E	1.01

Net Present value is the sum total of all the present values of cash Inflows and outflows of the project in its entire life.

Present value ratio is calculated as follows

Present value of Inflows/ Present value of Outflows

If Present value ratio is more than 1 then it means the project is worth acceptance and if ratio is less than 1 then the project’s cost is more than its income.