In: Finance
Question 1 has already been answered. Please answer question 2 below the table only.
Assume I=6%.
(60 points)
|
Project |
CF0 |
CF1 |
CF2 |
CF3 |
CF4 |
CF5 |
|
A |
-12,000 |
3000 |
3000 |
4000 |
4000 |
1000 |
|
B |
-12,000 |
4000 |
4000 |
3000 |
3000 |
1000 |
|
C |
-12,000 |
3000 |
3000 |
3000 |
3000 |
1000 |
|
D |
-12,000 |
5000 |
3000 |
5000 |
3000 |
0 |
|
E |
-12,000 |
3000 |
3000 |
3000 |
3000 |
5000 |
|
F |
-12,000 |
0 |
0 |
6000 |
6000 |
6000 |
| Calculation of NPV of project | |||||||||||||
| Year | Discount Factor @ 6% | Project A | Project B | Project C | Project D | Project E | Project F | ||||||
| Cash flow | Present value | Cash flow | Present value | Cash flow | Present value | Cash flow | Present value | Cash flow | Present value | Cash flow | Present value | ||
| 0 | 1.00000 | -$12,000.00 | -$12,000.00 | -$12,000.00 | -$12,000.00 | -$12,000.00 | -$12,000.00 | -$12,000.00 | -$12,000.00 | -$12,000.00 | -$12,000.00 | -$12,000.00 | -$12,000.00 |
| 1 | 0.94340 | $3,000.00 | $2,830.19 | $4,000.00 | $3,773.58 | $3,000.00 | $2,830.19 | $5,000.00 | $4,716.98 | $3,000.00 | $2,830.19 | $0.00 | $0.00 |
| 2 | 0.89000 | $3,000.00 | $2,669.99 | $4,000.00 | $3,559.99 | $3,000.00 | $2,669.99 | $3,000.00 | $2,669.99 | $3,000.00 | $2,669.99 | $0.00 | $0.00 |
| 3 | 0.83962 | $4,000.00 | $3,358.48 | $3,000.00 | $2,518.86 | $3,000.00 | $2,518.86 | $5,000.00 | $4,198.10 | $3,000.00 | $2,518.86 | $6,000.00 | $5,037.72 |
| 4 | 0.79209 | $4,000.00 | $3,168.37 | $3,000.00 | $2,376.28 | $3,000.00 | $2,376.28 | $3,000.00 | $2,376.28 | $3,000.00 | $2,376.28 | $6,000.00 | $4,752.56 |
| 5 | 0.74726 | $1,000.00 | $747.26 | $1,000.00 | $747.26 | $1,000.00 | $747.26 | $0.00 | $0.00 | $5,000.00 | $3,736.29 | $6,000.00 | $4,483.55 |
| NPV | $774.29 | $975.97 | -$857.42 | $1,961.35 | $2,131.61 | $2,273.83 | |||||||
| Project | NPV | ||||||||||||
| A | $774.29 | ||||||||||||
| B | $975.97 | ||||||||||||
| C | -$857.42 | ||||||||||||
| D | $1,961.35 | ||||||||||||
| E | $2,131.61 | ||||||||||||
| F | $2,273.83 | ||||||||||||
| Answer a | |||||||||||||
| I will invest in Projects A,B,D,E and F as these projects have positive NPV. | |||||||||||||
| Answer B | |||||||||||||
| I will invest in Project F as it has highest NPV compared to other projects. | |||||||||||||
| Answer C | |||||||||||||
| I will invest in Project E and F as these combination will give highest NPV. | |||||||||||||
| Answer D | |||||||||||||
| I will invest in Project D,E and F as these combination will give highest NPV. | |||||||||||||