Question
In: Economics
Net present Value
Company A wishes to invest in 4 projects X, W, Y & Z whose net benefits are given in the table below.
|
Project |
Years |
||||
|
|
0 |
1 |
2 |
3 |
4 |
|
W |
(1000) |
1200 |
0 |
0 |
0 |
|
X |
(1361.1) |
500 |
500 |
500 |
500 |
|
Y |
(1000) |
1200 |
1500 |
0 |
0 |
|
Z |
(2000) |
1000 |
0 |
0 |
0 |
Using a discount rate of 10% appraise the 4 projects using the NPV criteria.
Solutions
Expert Solution
NPV= R1/(1+r)1 + R2/(1+r)2 + .......... + R4/(1+r)n - Ct
NPV(W) = 1200/(1.1)1 + 0/(1.1)2 + 0/(1.1)3 + 0/(1.1)4 - 1000 = 90.91
NPV(X) = 500/(1.1)1 + 500/(1.1)2 + 500/(1.1)3 + 500/(1.1)4 - 1361.1 = 223.84
NPV(Y) = 1200/(1.1)1 + 1500/(1.1)2 + 0/(1.1)3 + 0/(1.1)4 - 1000 = 1330.58
NPV(Z) = 1000/(1.1)1 + 0/(1.1)2 + 0/(1.1)3 + 0/(1.1)4 - 2000 = -1090.91
For mutually exclusive projects, project Y is chosen as it has the highest NPV.
Project W & X are also viable since they have a positive NPV. However, project Z will only be chosen if it is very critical or essential.
The NPV criteria takes into consideration time value of money and the profitability of the project.
Joes answered 3 years agoRelated Solutions
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