Question

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
($45,000 Investment)					($40,000 Investment)
Year	Cash Flow				Year	Cash Flow
1	$	12,000			1	$	21,000
2		15,000			2		18,000
3		18,000			3		12,000
4		25,000

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

Project E:

Project H:

b. Determine the net present value of the projects based on a discount rate of 13 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)
  

Project E:

Project H:

c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 13 percent?
  

	Project E
	Project H
	Both H and E

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= -$45,000. 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 $25,000.

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= -$45,000. 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 13%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 13% discount rate is $5,174.54.

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 13%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 13% discount rate is $997.31.

c.If the projects are not mutually exclusive, both projects E and H should be accepted at a discount rate of 13%. The reason being that the projects have a positive net present value.

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