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
($37,000 Investment)					($35,000 Investment)
Year	Cash Flow				Year	Cash Flow
1	$	9,000			1	$	17,000
2		12,000			2		18,000
3		18,000			3		17,000
4		20,000

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 9 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 9 percent?
  

	Project E
	Project H
	Both H and E

Answer 1

Net present value (NPV) = Present value of cash inflow - present value of cash outflow.

	Cash flow		Discounted cash flow
	1	2	3	4	5
Year	Project E	Project H	Discount rate @9%	Project E (1*3)	Project H (2*3)
0	($37,000)	($35,000)	1	($37,000)	($35,000)
1	$9,000	$17,000	0.9174	$8,256.60	$15,595.80
2	$12,000	$18,000	0.8417	$10,100.4	$15,150.60
3	$18,000	$17,000	0.7722	$13,899.6	$13,127.40
4	$20,000	$0	0.7084	$14,168	$0
NPV at 0%	$22,000	$17,000	NPV at 9%	$9,424.60	$8,873.80

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

Project E	$22,000
Project H	$17,000

b) Determine the net present value of the projects based on a discount rate of 9 percent.

Project E	$9,424.60
Project H	$8,873.80

c)  If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 9 percent?

Both H and E.