Question

A firm, with an 18% cost of capital, is considering the

following projects (on January 1, 2011):

Jan. 1, 2011, Cash outflow (000's omitted)
Dec. 31, 2015, Cash inflow (000's omitted)
Project internal rate of return

Project A $3,500 $7,400 15%
Project B 4,000 9,950 ?

Present Value of $1 Due at End of "N" Periods
N 12% 14% 15% 16% 18% 20% 22%
4 .6355 .5921 .5718 .5523 .5158 .4823 .4230
5 .5674 .5194 .4972 .4761 .4371 .4019 .3411
6 .5066 .4556 .4323 .4104 .3704 .3349 .2751

52. Using the net present value method, Project A's net
present value is

a. $316,920
b. $0
c. $(265,460)
d. $(316,920)

Answer 1

a. $316,920

Step-by-step explanation:

The computation of the net present value for Project A is shown below:

The net present value = Cash inflow after considering the discount factor - initial cost or initial investment

Cash inflow after considering the discount factor = $7,400,000

The discount factor for 4 years at 18% = 0.5158

So, the cash inflow is

= $7,400,000 × 0.5158

= $3,816,920

And, the initial investment is $3,500,000

So, the net present value is

= $3,816,920 - $3,500,000

= $316,920