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:

Project E ($23,000 Investment)
Year Cash Flow
1 $ 5,000
2 6,000
3 7,000
4 10,000
Project H ($25,000 Investment)
Year Cash Flow
1 $ 16,000 2 5,000 3 4,000 Required:
a. Determine the net present value of the projects based on a zero percent discount rate.
b. Determine the net present value of the projects based on a 9 percent discount rate.

Answer 1

USING 0% DISCOUNT RATE

PROJECT E

Year Cashflow DF@0% PV

$ $

0 (23,000) 1 (23,000)

1 5,000 1 5,000

2 6000 1 6,000

3 7000 1 7,000

4 10,000 1 10,000

NPV 5,000

PROJECT H

Year Cashflow DF@0% PV

$ $

0 (25,000) 1 (23,000)

1 16,000 1 16,000

2 5,000 1 5,000

3 4,000 1 4,000

NPV 2,000

Project A should be accepted

USING 9% DISCOUNT RATE

Year Cashflow DF@9% PV

$ $

0 (23,000) 1 (23,000)

1 5,000 0.9174 4,587

2 6000 0.8462 5,077

3 7000 0.7722 5,405

4 10,000 0.7084 7,084

NPV (847)

PROJECT H

Year Cashflow DF@9% PV

$ $

0 (25,000) 1 (23,000)

1 16,000 0.9714 15,542

2 5,000 0.8462 4,231

3 4,000 0.7722 3,089

NPV (138)

None of the projects should be accepted because they have negative NPV

Step-by-step explanation:

The question requires the computation of NPV using 0% and 9%.

The cashflows of the two projects will be discounted at 0% and 9%.

The discount factors for each project can be calculated using the formula (1+r)-n. The cashflows of the projects will be multiplied by the discount factors to obtain the present values. NPV is the difference between present values of cash inflows and initial outlay.