Question

You are considering investing $1,000,000 now (t= 0) in one of the two projects, Mono and Singe. Project Mono is a 1-year project and Project Singe is a 3-year project. The two projects are expected to provide their respective cash flows illustrated in the table below.

Project Cash Flow at t = 1 Cash Flow at t = 2 Cash Flow at t = 3

Mono $1,100,000 0 0

Singe $50,000 $ 50,000 $ 1,150,000

Which project would you invest in by selecting the higher NPV if the opportunity cost of capital is 2% p.a.? A. Project Mono because its NPV = $78,431 B. Project Singe because its NPV = $78,431 C. Project Mono because its NPV = $180,749 D. Project Singe because its NPV = $180,749 E. None of the above

Which project would you invest in by selecting the higher NPV if the opportunity cost of capital is 4% p.a.? A. Project Mono because its NPV = $116,651 B. Project Singe because its NPV = $116,651 C. Project Mono because its NPV = $157,692 D. Project Singe because its NPV = $157,692 E. None of the above

Determine the Equivalent Annual Annuity of Project Mono if the opportunity cost of capital is 4% p.a. [Hint: Use 4 decimal places in your calculations for accuracy] A. $19,231 B. $20,789 C. $47,692 D. $60,000 E. $156,000

Determine the Equivalent Annual Annuity of Project Singe if the opportunity cost of capital is 4% p.a. A. $38,884 B. $42,035 C. $82,487 D. $116,651 E. $121,317

What is the Profitability Index of Project Mono if the opportunity cost of capital is 4% p.a.? A. 1.92% B. 2.08% C. 5.77% D. 6.00% E. 15.60%

What is the Profitability Index of Project Singe if the opportunity cost of capital is 4% p.a.? A. 3.89% B. 4.20% C. 8.25% D. 11.67% E. 12.13%

Answer 1

NPV can be found using NPV function in EXCEL

=NPV(rate, Year1 to year3 cashflows)-Year0 cashflow

1. At Cost of capital 2%, NPV of Singe is higher at $180,749. Hence, Singe should be selected.

Option D is correct

2. At cost of capital 4%, singe has to selected because of higher NPV at $116,651

Option B is correct

3. equivalent annual annuity's have to be calculated using PMT function in EXCEL

=PMT(rate,nper,pv,fv,type)

rate=4%

nper=1

pv=NPV at 4%

fv=0

=PMT(4%,1,-57692,0,0)

PMT=Equivalent annual Annuity=$60,000

Option D is correct

At the same time, use the same formula for finding Singe Equivalent Annual Annuity

=PMT(rate,nper,pv,fv,type)

rate=4%

nper=3

pv=NPV of Singe at 4%

=PMT(4%,3,-116651,0,0)

PMT=Equivalent annual Annuity=$42,035

Option B is correct

4.Profitability Indeex can be found using NPV function

=NPV((rate, Year1 to Year3 cashflows)-Year0 cashflow)-1

PI of mono=5.77% (Option C)

PI of Singe=11.67%( Option D is correct)

You can find these in the above attached file