Question

A firm is considering two projects both with a life of five years.

Project LUCKY costs $22,000 and after tax cash flows will be $6,000 annually.

Project COLT will cost $24,000 and return after tax cash flows of $5,000; $6,000; $7,000; $8,000 and $9,000.

The corporation's WACC is 10%

Answer 1

PROJECT LUCKY HAS NPV OF $ 744.72, PROJECT COLT HAS NPV OF $ 1815.74

ON THE BASIS OF NPV, PROJECT COLT IS BETTER

Year	Project LUCKY Cash Flows (i)	DF@ 10%	DF@ 10% (ii)	PV of Project LUCKY ( (i) * (ii) )
0	-22000	1	1	(22,000.00)
1	6000	1/((1+10%)^1)	0.909	5,454.55
2	6000	1/((1+10%)^2)	0.826	4,958.68
3	6000	1/((1+10%)^3)	0.751	4,507.89
4	6000	1/((1+10%)^2)	0.683	4,098.08
5	6000	1/((1+10%)^3)	0.621	3,725.53
		NPV		744.72

Year	Project COLT Cash Flows (i)	DF@ 10%	DF@ 10% (ii)	PV of Project COLT ( (i) * (ii) )
0	-24000	1	1	(24,000.00)
1	5000	1/((1+10%)^1)	0.909	4,545.45
2	6000	1/((1+10%)^2)	0.826	4,958.68
3	7000	1/((1+10%)^3)	0.751	5,259.20
4	8000	1/((1+10%)^2)	0.683	5,464.11
5	9000	1/((1+10%)^3)	0.621	5,588.29
		NPV		1,815.74