Question

ShamrockInc. has $170,718 to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides $32,000 at the end of each year for 8 years, and the other is to receive a single lump-sum payment of $422,695 at the end of the 8 years. Which alternative should Shamrock select? Assume the interest rate is constant over the entire investment.

Answer 1

Project B.

Step-by-step explanation:

The easiest way to solve this problem is to assume a dummy discount rate and then calculate the net present value (NPV) of each project. Let assume the rate of 10%, we have:

NPV of project A (project with cash inflows at the end of each year)= 0

NPV of project B (project with lump sum inflows at the end of year 8) = 26,472.

So, we should choose project B.