Question

Sally is considering the following two investment projects, I and II:

I. A 10-year investment project has an initial investment of $2650 today and maintenance expenses of $100 at the end of each of the first five years. The investment has returns of $500 at the end of each year for 10 years.

II. An 18-year investment project which has an initial investment of $1250 today. The investment returns at $150 at the end each year for seventeen years and a return of $900 at the end of the 18th year.

Using a net present value at 10% annual effective, which investment project should she invest in. Explain why.

No excel solution please

Answer 1

Project I

Year	Cash Flow($)	PV @10%	PV of cash flow
0	-2650	1.000	-2650.00
1	400	0.909	363.64
2	400	0.826	330.58
3	400	0.751	300.53
4	400	0.683	273.21
5	400	0.621	248.37
6	500	0.564	282.24
7	500	0.513	256.58
8	500	0.467	233.25
9	500	0.424	212.05
10	500	0.386	192.77
NPV =	43.20

Project II

Year	Cash Flow($)	PV @10%	PV of cash flow
0	-1250	1.000	-1250.00
1	150	0.909	136.36
2	150	0.826	123.97
3	150	0.751	112.70
4	150	0.683	102.45
5	150	0.621	93.14
6	150	0.564	84.67
7	150	0.513	76.97
8	150	0.467	69.98
9	150	0.424	63.61
10	150	0.386	57.83
11	150	0.350	52.57
12	150	0.319	47.79
13	150	0.290	43.45
14	150	0.263	39.50
15	150	0.239	35.91
16	150	0.218	32.64
17	150	0.198	29.68
18	900	0.180	161.87
NPV =	115.11

Select project II as it has higher NPV

For any clarification comment.

Please thumbs up, Thank you