Question
In: Finance
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The...
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. The annualized NPV of Project B is ________.
Project A Project B Initial Investment
$350,000 $425,000
Year Cash Inflows (CF)
1 $140,000 $175,000
2 $165,000 $150,000
3 $190,000 $125,000
4 00000000 $100000
5 00000000 $75,000
6 00000000 $50,000
Solutions
Expert Solution
| Annualized NPV = NPV of project / present value annuity factor @ 10% over the project life | ||||||
| Calculation of Annualized NPV of projects | ||||||
| Year | Discount Factor @ 10% | Project A | Project B | |||
| Cash flow | Present Value | Cash flow | Present Value | |||
| 0 | 1.00000 | -$350,000.00 | -$350,000.00 | -$425,000.00 | -$425,000.00 | |
| 1 | 0.90909 | $140,000.00 | $127,272.73 | $175,000.00 | $159,090.91 | |
| 2 | 0.82645 | $165,000.00 | $136,363.64 | $150,000.00 | $123,966.94 | |
| 3 | 0.75131 | $190,000.00 | $142,749.81 | $125,000.00 | $93,914.35 | |
| 4 | 0.68301 | $0.00 | $0.00 | $100,000.00 | $68,301.35 | |
| 5 | 0.62092 | $0.00 | $0.00 | $75,000.00 | $46,569.10 | |
| 6 | 0.56447 | $0.00 | $0.00 | $50,000.00 | $28,223.70 | |
| NPV of project | $56,386.18 | $95,066.34 | ||||
| Annualized NPV of Project A = NPV of project / present value annuity factor @ 10% FOR 3 years | ||||||
| Annualized NPV of Project A = $56,386.18 / 2.48685 | ||||||
| Annualized NPV of Project A = $22,673.72 | ||||||
| Annualized NPV of Project B = NPV of project / present value annuity factor @ 10% FOR 6 years | ||||||
| Annualized NPV of Project B = $95,066.34 / 4.36626 | ||||||
| Annualized NPV of Project B = $21,827.93 | ||||||
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