Question

Suppose a company has two mutually exclusive projects, both of which are three years in length. Project A has an initial outlay of $7,000 and has expected cash flows of $3,000 in year 1, $4,000 in year 2, and $4,000 in year 3. Project B has an initial outlay of $10,000 and has expected cash flows of $2,000 in year 1, $4,000 in year 2, and $5,000 in year 3. The required rate of return is 12% for projects at this company. What is the net present value for the best project? (Answer to the nearest dollar.)

Answer 1

Project A

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

• Press the CF button.
• CF0= -$7,000. 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 weighted average required return of 12%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 12% required return is $1,714.47.

Project B

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

• Press the CF button.
• CF0= -$10,000. 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 weighted average required return of 12%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 12% required return is -$1,466.60.

Therefore, the NPV of the best project is that of project A , $1,714.47.

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