Question

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
1	$	9,000			1	$	17,000
2		14,000			2		15,000
3		20,000			3		13,000
4		22,000

a. Determine the net present value of the projects based on a zero percent discount rate.

b. Determine the net present value of the projects based on a discount rate of 11 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)

c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 11 percent?

• Project E

• Project H

• Both H and E

Answer 1

a.Project E

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$40,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 0%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 0% discount rate is $25,000.

Project H

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$36,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 0%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 0% discount rate is $9,000.

b.Project E

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$40,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 11%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 11% discount rate is $8,586.73.

Project H

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$36,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 0%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 0% discount rate is $995.14.

c.If the projects are not mutually exclusive, I would accept both the projects since both generate a positive net present value.

Hence, the answer is option c.

In case of any query, kindly comment on the solution.