Question

Giant Equipment Ltd. is considering two projects to invest next year. Both projects have the same start-up costs. Project A will produce annual cash flows of $42,000 at the beginning of each year for eight years. Project B will produce cash flows of $48,000 at the end of each year for seven years. The company requires a 12% return.

Required:

a) Which project should the company select and why?

b) Which project should the company select if the interest rate is 14% at the cash flows in Project B is also at the beginning of each year?

Answer 1

Particulars	A	B
Annual cash flow	$             42,000	$             48,000
× PV annuity factor	5.563757	4.563757
Present value of inflows	$     233,677.77	$     219,060.31

Select A.

b)

Particulars	A	B
Annual cash flow	$             42,000	$             48,000
× PV annuity factor	5.288305	4.888668
Present value of inflows	$     222,108.80	$     234,656.04

Select B

please rate.