Question

Labeau Products, Ltd., of Perth, Australia, has $21,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:

Invest in Invest in
Project X Project Y
Investment required $ 21,000 $ 21,000
Annual cash inflows $ 8,000
Single cash inflow at the end of 6 years $50,000
Life of the project 6 years 6 years
The company’s discount rate is 18%.
Required:
Determine the net present values. (Any cash outflows should be indicated by a minus sign.

Answer 1

Project X = $6,980.82

Project Y = - $2,478.42

Step-by-step explanation:

The Present value is the price today of future cash flows and is calculated as follows :

Project X

($21,000) CF 0

$8,000 CF 1

$8,000 CF 2

$8,000 CF 3

$8,000 CF 4

$8,000 CF 5

$8,000 CF 6

I/YR = 18%

Therefore, NPV is $6,980.82

Project Y

($21,000) CF 0

$0 CF 1

$0 CF 2

$0 CF 3

$0 CF 4

$0 CF 5

$50,000 CF 6

I/YR = 18%

Therefore, NPV is - $2,478.42