Question
In: Finance
A firm is considering two projects both with a life of five years. Project LUCKY costs...
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%
Solutions
Expert Solution
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 | |||
jeff jeffy answered 1 year agoRelated Solutions
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