Difficulty: Basic
The following are the cash flows of two projects:
The following are the cash flows of two projects:
Learning Objective: 08-01 Calculate
the net present value of a project.
Suppose that you can choose only one of these projects. Which would you choose?
A
B
Year
0
1
2
3
4
Year
0
1
2
3
4
Project A
$ (280)
160
160
160
160
Project A
$ (280)
160
160
160
160
$227.1
8
$167.6
3
Project B
$ (280)
180
180
180
Project B
$ (280)
180
180
180
b.
References
Worksheet
a.Calculate the NPV for both projects if the discount rate is 10%. (Donotround
intermediatecalculations.Roundyouranswersto2decimalplaces.)
a.Calculate the NPV for both projects if the discount rate is 10%. (Donotround
intermediatecalculations.Roundyouranswersto2decimalplaces.)
Project NPV
Project A
+/-1
%
+/-1
%
A
B
$227.1
8
$167.6
3
Project NPV
a.
a.
b.
b.
CF0 = −280
CO1 = 160 FO1 = 4 I
= 10
NPV CPT = 227.18
CF0 = −280
CO1 = 180 FO1 = 3 I
= 10
NPV CPT = 167.63
NPVB = −$280 + [$180 × Annuity factor (10%, 3 periods)]
Some values below may show as rounded for display purposes, though unrounded
numbers should be used for actual calculations.
Since you can only choose one project, select the one with the higher positive NPV.
Calculator computations:
b.Suppose that you can choose only one of these projects. Which would you choose?
Project A
= −$280 + $180 ×
= −$280 + $160 ×
−
−
= $167.63
] = $227.18
[
[
]
1
0.10
1
0.10
1
0.10 × (1.10)3
1
0.10 × (1.10)4
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