Question

8

Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
  

Project E					Project H
($42,000 Investment)					($40,000 Investment)
Year	Cash Flow				Year	Cash Flow
1	$	10,000			1	$	21,000
2		15,000			2		16,000
3		21,000			3		14,000
4		23,000

a. Determine the net present value of the projects based on a zero percent discount rate.

b. Determine the net present value of the projects based on a discount rate of 12 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)

  
c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 12 percent?

Answer 1

a.Project E

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$42,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 0%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 0% discount rate is $27,000.

Project H

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$40,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 0%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 0% discount rate is $11,000.

b.Project E

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$42,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 12%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 12% discount rate is $8,450.78

Project H

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$40,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 12%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 12% discount rate is $1,470.03.

c.If the projects are not mutually exclusive, both projects can be accepted at a discount rate of 12% since both projects have a positive net present value.

In case of any query, kindly comment on the solution.