Question

A company facing an interest rate of 8% must choose among projects offering the following four-year cash flows. If the company is employing the net present value criterion, which project should they choose? $15,000 in year 1; $15,000 in year 2; $15,000 in year 3; and $15,000 in year 4 $25,000 in year 1; $15,000 in year 2; $10,000 in year 3; and $5,000 in year 4 $5,000 in year 1; $5,000 in year 2; $25,000 in year 3; and $25,000 in year 4 $5,000 in year 1; $5,000 in year 2; $20,000 in year 3; and $30,000 in year 4

Answer 1

Choose project 1 with highest NPV

Step-by-step explanation:

Calculate NPV for each of the project

1) Project 1.

NPV = 15,000 / 1.08 + 15000/1.08^2 + 15000/1.08^3 + 15000/1.08^4 = $49,681.9

2) Project 2:

NPV = 25000/1.08 + 15000/1.08^2 + 10000/1.08^3 + 5000/1.08^4 = $47,621.7

3) Project 3:

NPV = 5000/1.08 + 5000/1.08^2 + 25000/1.08^3 + 25000/1.08^4 = $47,137.9

4) Project 4:

NPV = 5000/1.08 + 5000/1.08^2 + 20000/1.08^3 + 30000/1.08^4 = $46,843.9