Question

Cavu Air Inc., a drone manufacturer, is reviewing its annual budget. It is considering investments in three different technologies. Consider the following cash flows of the three independent projects. Assume a discount rate of 9% percent. The company has $20 million to invest in projects this year.

Required return is 9%

Annual cash flows

Projects	A	B	C
Year 0	$ (7,500,000)	$ (10,500,000)	$ (20,000,000)
Year 1	$14,000,000	$10,000,000	$18,000,000
Year 2	$6,000,000	$25,000,000	$32,000,000
Year 3	$3,500,000	$22,500,000	$15,000,000

Based on the NPV, rank these investments.

Answer 1

Project	A	B	C
NPV	$13,096,758.84	$37,090,440.06	$35,030,273.45
Rank	III	I	II

Explanation:

	Projects A
Year	Cash Flow (CA)	Computation of PV Factor	PV Factor @ 9 % (F)	PV (CA x F)
0	-$7,500,000	1/ (1+0.09)0	1	-$7,500,000
1	14,000,000	1/ (1+0.09)1	0.91743119266055	1,2844,036.697248
2	6,000,000	1/ (1+0.09)2	0.84167999326656	5,050,079.959599
3	3,500,000	1/ (1+0.09)3	0.77218348006106	2,702,642.180214
			NPVA	$13,096,758.837061

	Projects B
Year	Cash Flow (CB)	Computation of PV Factor	PV Factor @ 9 % (F)	PV (CB x F)
0	-$10,500,000	1/ (1+0.09)0	1	-$10,500,000
1	10,000,000	1/ (1+0.09)1	0.91743119266055	9,174,311.926606
2	25,000,000	1/ (1+0.09)2	0.84167999326656	21,041,999.831664
3	22,500,000	1/ (1+0.09)3	0.77218348006106	17,374,128.301374
			NPVB	$37,090,440.059644

	Projects C
Year	Cash Flow (CC)	Computation of PV Factor	PV Factor @ 9 % (F)	PV (CC x F)
0	-$20,000,000	1/ (1+0.09)0	1	-$20,000,000
1	18,000,000	1/ (1+0.09)1	0.91743119266055	16,513,761.467890
2	32,000,000	1/ (1+0.09)2	0.84167999326656	26,933,759.784530
3	15,000,000	1/ (1+0.09)3	0.77218348006106	11,582,752.200916
			NPVC	$35,030,273.453336