Question

1. You are ask to evaluate the following mutually exclusive projects, Project X which has an initial cost of $5,060,000 and ten annual estimated net cash flows of $1,722,000 and Project Y which has an initial cost of $5,060,000 and five annual estimated cash flows of $2,079,000. Use two different standardized NPV methods to evaluate these projects at a cost of capital of 11 percent. (Please show all of your calculations).   Discuss the logic of each of these methods. Are they realistic alternatives to the standard NPV method?

Answer 1

	Project X	PV		Project Y	PV
0	-5060000	-5060000		-5060000	-5060000
1	1722000	1551351.351		2079000	1872972.973
2	1722000	1397613.83		2079000	1687363.039
3	1722000	1259111.559		2079000	1520146.882
4	1722000	1134334.737		2079000	1369501.695
5	1722000	1021923.187		2079000	1233785.311
6	1722000	920651.5197			2623769.9
7	1722000	829415.7836
8	1722000	747221.4266
9	1722000	673172.4564
10	1722000	606461.6724
		5081257.523
NPV		$ 5,081,257.52			$ 2,623,769.90
		=NPV(0.11,Cash Flows from Year 1-10)-5060000			=NPV(0.11,Cash Flows from Year 1-5)-5060000

Net present value is calculated by adding all the individual Present values of each year at the discount rate of given 11% and finally subtracting the initial investment from it. It has been shown in the Excel above.

The other method is simply by using the NPV function in Excel i.e. =NPV(Rate, Cash Inflows)-Initial Investment

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