Project A requires an original investment of $60,800. The project will yield cash flows of $18,000...

Project A requires an original investment of $60,800. The project will yield cash flows of $18,000 per year for seven years. Project B has a calculated net present value of $3,810 over a four year life. Project A could be sold at the end of four years for a price of $15,700.

Below is a table for the present value of $1 at Compound interest.

Year	6%	10%	12%
1	0.943	0.909	0.893
2	0.890	0.826	0.797
3	0.840	0.751	0.712
4	0.792	0.683	0.636
5	0.747	0.621	0.567

Below is a table for the present value of an annuity of $1 at compound interest.

Year	6%	10%	12%
1	0.943	0.909	0.893
2	1.833	1.736	1.690
3	2.673	2.487	2.402
4	3.465	3.170	3.037
5	4.212	3.791	3.605

(a) Using the present value tables above, determine the net present value of Project A over a four-year life with salvage value assuming a minimum rate of return of 12%. Round your answer to two decimal places. Enter negative values as negative numbers.
$

(b) Which project provides the greatest net present value?

Expert Solution

Statement showing Cash flows
Particulars	Time	PVf 12%	Amount	PV
Cash Outflows	-	1.0000	(60,800.00)	(60,800.00)
PV of Cash outflows = PVCO				(60,800.00)
Cash inflows	1.00	0.8930	18,000.00	16,074.00
Cash inflows	2.00	0.7970	18,000.00	14,346.00
Cash inflows	3.00	0.7120	18,000.00	12,816.00
Cash inflows	4.00	0.6360	18,000.00	11,448.00
Cash inflows = Salvage Value	4.00	0.6360	15,700.00	9,985.20
PV of Cash Inflows =PVCI				64,669.20
NPV= PVCI - PVCO				3,869.20

b) project A has slightly higher NPV and thus is preferred
Project A NPV	3,869.20
Project B NPV	3,810.00

jeff jeffy answered 1 year ago

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