Question
In: Finance
Keller Construction is considering two new investments. Project E calls for the purchase of earth-moving equipment....
Keller Construction is considering two new investments. Project E calls for the purchase of earth-moving equipment. Project H represents the investment in a hydraulic lift. Keller wishes to use a NPV profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B.
Project E ($20,000 investment) Project H ($20,000 investment)
Year Cash Flow Year Cash Flow
1 $5,000 1 $16,000
2 6,000 2 5,000
3 7,000 3 4,000
4 10,000
a. Determine the NPV of the projects based on a zero discount rate.
NPV
Project E $
Project H $
b. Determine the NPV of the projects based on a 9 percent discount rate. (Round "PV Factors" to 3 decimal places. Round the final answers to the nearest whole dollar.)
NPV
Project E $
Project H $
c. If the two projects are not mutually exclusive, what would your acceptance or rejection decision be if the cost of capital (discount rate) is 10 percent? (Use the NPV profile for your decision; no actual numbers are necessary.)
Project E
Project H
Both H and E
e. If the two projects are mutually exclusive (the selection of one precludes the selection of the other), what would be your decision if the cost of capital is (1) 6 percent, (2) 13 percent, (3) 18 percent? Use the NPV profile for your answer.
6% cost of capital (Click to select)
13% cost of capital (Click to select)
18% cost of capital (Click to select)
Solutions
Expert Solution
(a)
| Calulation of NPV of Project - E | Calulation of NPV of Project - H | |||||||
| Year | Cashflow | DF @0% | PV | Year | Cashflow | DF @0% | PV | |
| 0 | $ (20,000) | 1.0000 | $ (20,000) | 0 | $ (20,000) | 1.0000 | $ (20,000) | |
| 1 | $ 5,000 | 1.0000 | $ 5,000 | 1 | $ 16,000 | 1.0000 | $ 16,000 | |
| 2 | $ 6,000 | 1.0000 | $ 6,000 | 2 | $ 5,000 | 1.0000 | $ 5,000 | |
| 3 | $ 7,000 | 1.0000 | $ 7,000 | 3 | $ 4,000 | 1.0000 | $ 4,000 | |
| 4 | $ 10,000 | 1.0000 | $ 10,000 | Net Present Value | $ 5,000 | |||
| Net Present Value | $ 8,000 |
NPV of Project-E = $8,000
NPV of Project-H = $5,000
(b)
| Calulation of NPV of Project - E | Calulation of NPV of Project - H | |||||||
| Year | Cashflow | DF @ 9% | PV | Year | Cashflow | DF @ 9% | PV | |
| 0 | $ (20,000) | 1.0000 | $ (20,000.000) | 0 | $ (20,000) | 1.0000 | $ (20,000.000) | |
| 1 | $ 5,000 | 0.9174 | $ 4,587.156 | 1 | $ 16,000 | 0.9174 | $ 14,678.899 | |
| 2 | $ 6,000 | 0.8417 | $ 5,050.080 | 2 | $ 5,000 | 0.8417 | $ 4,208.400 | |
| 3 | $ 7,000 | 0.7722 | $ 5,405.284 | 3 | $ 4,000 | 0.7722 | $ 3,088.734 | |
| 4 | $ 10,000 | 0.7084 | $ 7,084.252 | Net Present Value | $ 1,976 | |||
| Net Present Value | $ 2,127 |
NPV of Project-E = $2,127
NPV of Project-H = $1,976
(c)
Project-H should be selected as the NPV of the project E reduce more when discount rate 0% to 9% and Cashflow of near future is high under Project-H so Discount point for near future use to calculate the present value so present value of that cashflow is higher.
(For Understanding Calculation :
| Calulation of NPV of Project - E | Calulation of NPV of Project - H | |||||||
| Year | Cashflow | DF @ 10% | PV | Year | Cashflow | DF @ 10% | PV | |
| 0 | $ (20,000) | 1.0000 | $ (20,000.000) | 0 | $ (20,000) | 1.0000 | $ (20,000.000) | |
| 1 | $ 5,000 | 0.9091 | $ 4,545.455 | 1 | $ 16,000 | 0.9091 | $ 14,545.455 | |
| 2 | $ 6,000 | 0.8264 | $ 4,958.678 | 2 | $ 5,000 | 0.8264 | $ 4,132.231 | |
| 3 | $ 7,000 | 0.7513 | $ 5,259.204 | 3 | $ 4,000 | 0.7513 | $ 3,005.259 | |
| 4 | $ 10,000 | 0.6830 | $ 6,830.135 | Net Present Value | $ 1,683 | |||
| Net Present Value | $ 1,593 |
this calculation not part of answer just for understanding)
(e) To calculate NPV of Mutually exclusive Projects then first we calculate the combine cashflow of the both project.
| Calculation of Combine Cashflow | |||
| Year | Proj-E | Proj-H | Cashflow |
| 0 | $ (20,000) | $ (20,000) | $ (40,000) |
| 1 | $ 5,000 | $ 16,000 | $ 21,000 |
| 2 | $ 6,000 | $ 5,000 | $ 11,000 |
| 3 | $ 7,000 | $ 4,000 | $ 11,000 |
| 4 | $ 10,000 | $ - | $ 10,000 |
(i) Cost of Capital is 6%
| Calculation of NPV | |||
| Year | Cashflow | DF @ 6% | PV |
| 0 | $ (40,000) | 1.0000 | $ (40,000.000) |
| 1 | $ 21,000 | 0.9434 | $ 19,811.321 |
| 2 | $ 11,000 | 0.8900 | $ 9,789.961 |
| 3 | $ 11,000 | 0.8396 | $ 9,235.812 |
| 4 | $ 10,000 | 0.7921 | $ 7,920.937 |
| Net Present Value | $ 6,758 |
NPV of combine cash flow is positive so Projects should be accepted
(ii) Cost of Capital is 13%
| Calculation of NPV | |||
| Year | Cashflow | DF @ 13% | PV |
| 0 | $ (40,000) | 1.0000 | $ (40,000.000) |
| 1 | $ 21,000 | 0.8850 | $ 18,584.071 |
| 2 | $ 11,000 | 0.7831 | $ 8,614.614 |
| 3 | $ 11,000 | 0.6931 | $ 7,623.552 |
| 4 | $ 10,000 | 0.6133 | $ 6,133.187 |
| Net Present Value | $ 955 |
NPV of combine cash flow is positive so Projects should be accepted.
(iii) Cost of Capital is 18%
| Calculation of NPV | |
| Year |
 jeff jeffy answered 1 year agoRelated SolutionsKeller Construction is considering two new investments. Project E calls for the purchase of earth-moving equipment....Keller Construction is considering two new investments. Project
E calls for the purchase of earth-moving equipment. Project H
represents the investment in a hydraulic lift. Keller wishes to use
a NPV profile in comparing the projects. The investment and cash
flow patterns are as follows: Use Appendix B.
Project E ($20,000 investment) Project H ($20,000
investment)
Year Cash Flow Year Cash Flow
1 $5,000 1 $16,000
2 6,000 2 5,000
3 7,000 3 4,000
4 10,000
a. Determine the NPV...
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment....Keller Construction is
considering two new investments. Project E calls for the purchase
of earthmoving equipment. Project H represents an investment in a
hydraulic lift. Keller wishes to use a net present value profile in
comparing the projects. The investment and cash flow patterns are
as follows: Use Appendix B for an approximate answer but calculate
your final answer using the formula and financial calculator
methods.
Project E
Project H
($30,000 Investment)
($28,000 Investment)
Year
Cash Flow
Year
Cash Flow...
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment....Keller Construction is considering two new investments. Project
E calls for the purchase of earthmoving equipment. Project H
represents an investment in a hydraulic lift. Keller wishes to use
a net present value profile in comparing the projects. The
investment and cash flow patterns are as follows: Use Appendix B
for an approximate answer but calculate your final answer using the
formula and financial calculator methods. Project E Project H
($43,000 Investment) ($39,000 Investment) Year Cash Flow Year Cash
Flow...
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment....Keller Construction is considering two new investments. Project
E calls for the purchase of earthmoving equipment. Project H
represents an investment in a hydraulic lift. Keller wishes to use
a net present value profile in comparing the projects. The
investment and cash flow patterns are as follows: Use Appendix B
for an approximate answer but calculate your final answer using the
formula and financial calculator methods. Project E Project H
($23,000 Investment) ($25,000 Investment) Year Cash Flow Year Cash
Flow...
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment....Keller Construction is considering two new investments. Project
E calls for the purchase of earthmoving equipment. Project H
represents an investment in a hydraulic lift. Keller wishes to use
a net present value profile in comparing the projects. The
investment and cash flow patterns are as follows: Use Appendix B
for an approximate answer but calculate your final answer using the
formula and financial calculator methods.
Project E
Project H
($40,000 Investment)
($36,000 Investment)
Year
Cash Flow
Year
Cash Flow...
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment....Keller Construction is considering two new investments. Project
E calls for the purchase of earthmoving equipment. Project H
represents an investment in a hydraulic lift. Keller wishes to use
a net present value profile in comparing the projects. The
investment and cash flow patterns are as follows: Use Appendix B
for an approximate answer but calculate your final answer using the
formula and financial calculator methods.
Project E
Project H
($32,000 Investment)
($27,000 Investment)
Year
Cash Flow
Year
Cash Flow...
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment....Keller Construction is considering two new investments. Project
E calls for the purchase of earthmoving equipment. Project H
represents an investment in a hydraulic lift. Keller wishes to use
a net present value profile in comparing the projects. The
investment and cash flow patterns are as follows: Use Appendix B
for an approximate answer but calculate your final answer using the
formula and financial calculator methods.
Project E
Project H
($23,000 Investment)
($25,000 Investment)
Year
Cash Flow
Year
Cash...
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment....Keller Construction is considering two new investments. Project
E calls for the purchase of earthmoving equipment. Project H
represents an investment in a hydraulic lift. Keller wishes to use
a net present value profile in comparing the projects. The
investment and cash flow patterns are as follows: Use Appendix B
for an approximate answer but calculate your final answer using the
formula and financial calculator methods.
Project E
Project H
($43,000 Investment)
($39,000 Investment)
Year
Cash Flow
Year
Cash...
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment....Keller Construction is considering two new investments. Project
E calls for the purchase of earthmoving equipment. Project H
represents an investment in a hydraulic lift. Keller wishes to use
a net present value profile in comparing the projects. The
investment and cash flow patterns are as follows: Use Appendix B
for an approximate answer but calculate your final answer using the
formula and financial calculator methods.
Project E
Project H
($45,000 Investment)
($40,000 Investment)
Year
Cash Flow
Year
Cash...
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment....Keller Construction is considering two new investments. Project
E calls for the purchase of earthmoving equipment. Project H
represents an investment in a hydraulic lift. Keller wishes to use
a net present value profile in comparing the projects. The
investment and cash flow patterns are as follows: Use Appendix B
for an approximate answer but calculate your final answer using the
formula and financial calculator methods.
Project E
Project H
($37,000 Investment)
($35,000 Investment)
Year
Cash Flow
Year
Cash...
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