Question

"Consider two mutually exclusive projects that will be conducted for a total of 6 years. Project A lasts 3 years (so it will need to be repeated 1 time) and has the following cash flow: Year 0 -$18,000; Year 1 $20,000; Year 2 $16,000; Year 3 $18,000. Project B lasts 2 years (so it will need to be repeated 2 times) and has the following cash flow: Year 0 -$17,000; Year 1 $15,000; Year 2 $22,000. Assume both projects can be repeated with the identical cash flows. The interest rate is 16%. Provide the Net Present Worth for 6 YEARS of the project that you should select. If neither project should be selected, enter 0."

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= -$18,000. 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 interest rate of 16%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 16% interest rate is $48,715.41.

Project B

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

• Press the CF button.
• CF0= -$17,000. 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 interest rate of 16%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 16% interest rate is $50,212.31.

Project B which has a net present value of $50,212.31 should be selected.

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