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Exercise 13-14 Comparison of Projects Using Net Present Value [LO13-2] Labeau Products, Ltd., of Perth, Australia,...
Exercise 13-14 Comparison of Projects Using Net Present Value [LO13-2]
Labeau Products, Ltd., of Perth, Australia, has $18,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:
| Invest in Project X |
Invest in Project Y |
|||
| Investment required | $ | 18,000 | $ | 18,000 |
| Annual cash inflows | $ | 7,000 | ||
| Single cash inflow at the end of 6 years | $ | 41,000 | ||
| Life of the project | 6 years | 6 years | ||
The company’s discount rate is 17%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the net present value of Project X.
2. Compute the net present value of Project Y.
3. Which project would you recommend the company accept?
Solutions
Expert Solution
( 1 ) -- Compute the net present value of Project X.
Answer -
Calculation of Net Present Value of Project X
| Particulars | Formula used | Calculation | Present Value ($) | |
| Initial investment | - | Given in question | (18000) | |
|
Annual cash inflows (years 1 to 6) |
p = Annual cash inflow = $7000 r = Discount rate = 17% n = Number of annual cash inflow = 6 |
$7000[1-(1+0.17)-6/0.17] | 25124 | |
|
Net Present Value |
$25124 - $18000 | 7124 | ||
.
( 2 ) -- Compute the net present value of Project Y.
Answer -
Calculation of Net Present Value of Project Y
| Particulars | Formula used | Calculation | Present Value ($) | |
| Initial investment | - | - | (18000) | |
|
Single cash inflow at the end of 6th year |
C = cash inflow at the end = $41000 r = Discount rate = 17% n = 6 years |
$41000 / (1+0.17)6 | 15983 | |
|
Net Present Value |
$15983 - $18000 | (2017) | ||
.
( 3 ) -- Which project would you recommend the company accept?
Answer -
Project X should be selected, Project Y does not provide the required 17% return, as shown by its negative Net present value.
ekkarill92 answered 2 years agoRelated Solutions
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Invest in
Project X
Invest in
Project Y
Investment
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$
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$
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Annual cash
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6
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Project A
Project B
Project C
Project D
Project E
Initial investment
$26,000
$500,000
$170,000
$950,000
$80,000
Year
Cash inflows
1
$4,000
$100,000
$20,000
$230,000
$ 0
2
4,000
120,000
19,000
230,000
0
3
4,000
140,000
18,000
230,000
0
4
4,000
160,000
17,000
230,000
20,000
5
4,000...
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Project A
Project B
Project C
Project D
Project E
Initial investment
$26,000
$500,000
$170,000
$950,000
$80,000
Year
Cash inflows
1
$4,000
$100,000
$20,000
$230,000
$ 0
2
4,000
120,000
19,000
230,000
0
3
4,000
140,000
18,000
230,000
0
4
4,000
160,000
17,000
230,000
20,000
5
4,000...
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