Question

Shell City considers 2 projects using the cost of capital of 12%. Project Sponge: cost $10,000, cash flows of $4,300; $5,200, and $4,700 in 3 years respectively. Project Whale: cost $14,000, cash flows of $5,600; $4,100; $6,500; and $5,300 in 4 years respectively. What is the equivalent ANPV of Project Sponge?

$811.26

$1,330.06

$450.68

$553.77

What is the equivalent ANPV of Project Whale?

$821.44

$610.52

$745.16

$418.90

Answer 1

Calculating the NPV of Project Sponge and Project whale:-

Year	Cash Flows of Project Sponge ($)	Cash Flows of Project Whale ($)	Cash IN-Flows ($)	PV Factor @12.00%	Present Value of Project Sponge($)	Present Value of Project Whale ($)
0	(10,000.00)	(14,000.00)	-	1.0000	(10,000.00)	(14,000.00)
1	4,300.00	5,600.00	-	0.8929	3,839.29	5,000.00
2	5,200.00	4,100.00	20.00	0.7972	4,145.41	3,268.49
3	4,700.00	6,500.00	30.00	0.7118	3,345.37	4,626.57
4	-	5,300.00		0.6355	-	3,368.25
				NPV	1,330.06	2,263.31

a). Equivalent ANPV of Project Sponge = NPV of Project Sponge/PVIFA(12%, 3 years)

= 1330.06/2.4018

= $ 553.77

hence, Option D

Note- PVIFA(12%, 3 years) = [1/(1+0.12)^1] + [1/(1+0.12)^2] + [1/(1+0.12)^3]

= 0.8929 + 0.7972 + 0.7118

= 2.4018

b).  Equivalent ANPV of Project Whale = NPV of Project Whale/PVIFA(12%, 4 years)

= 2263.31/3.0373

= $ 745.17

Hence, Option C.

Note- PVIFA(12%, 3 years) = [1/(1+0.12)^1] + [1/(1+0.12)^2] + [1/(1+0.12)^3] + [1/(1+0.12)^4]

= 0.8929 + 0.7972 + 0.7118 + 0.6355

= 3.0373

If you need any clarification, you can ask in comments.     

If you like my answer, then please up-vote as it will be motivating