Question

CRA Company is considering three investment opportunities with cash flows as described below:


Project C:
Cash investment now………………………………… $ 16,000
Annual Cash inflow for 5 years……………………… $ 10,000
Cash outflow at the end of 3 years…………………..$ 3,000

Additional cash inflow at the end of 5 years……….. $12,000

Project R:
Cash investment now…………………………………. $ 7,000

Cash inflow at the end of 2 years……….…………… $ 18,000
Cash inflow at the end of 7 years……………………. $ 40,000

Project A:
Cash investment now………………………………….. $ 21,000
Annual cash outflow for 4 years……………………… $ 5,000
Cash inflow at the end of 4 years……………………. $ 33,000

Required:
Compute the net present value of each project assuming CRA Company uses an 8% discount rate.

Please show how you got the answers.

Answer 1

Project - C

Net Present Value = $ 29,713 (Positive NPV)

Discount Rate =	8%
Cash Flows	Amount	PV Factor	Present Value
Initial Investment	($16,000)	1.0000	($16,000)
Annual cash inflow for 5 years	$10,000	3.99271	$ 39,927
Cash outflow at the end of 3 years	($3,000)	0.79383	($2381)
Additional cash inflow at the end of 5 years	$12,000	0.68058	$8,167
Net Present Value			$ 29,713

Project - R

Net Present Value = $ 31,772 (Positive NPV)

Discount Rate =	8%
Cash Flows	Amount	PV Factor	Present Value
Initial Investment	($7,000)	1.0000	($7,000)
Cash inflow at the end of 2 years	$18,000	0.85734	$ 15432
Cash inflow at the end of 7 years	$40,000	0.58349	$ 23,340
Net Present Value			$ 31,772

Project - A

Net Present Value = - $13,305 (Negative NPV)

Discount Rate =	5%
Cash Flows	Amount	PV Factor	Present Value
Initial Investment	($21,000)	1.0000	($21,000)
Annual cash outflow for 4 years	($5,000)	3.31213	($16561)
Cash inflow at the end of 4 years	$33,000	0.73503	$24,256
Net Present Value			- $13,305

Present Value Factors for calculation

Year 1 = 0.92593

Year 2 = 0.85734

Year 3 = 0.79383

Year 4 = 0.73503

Year 5 = 0.68058

Year 6 = 0.63017

Year 7 = 0.58349