Question

Labeau Products, Ltd., of Perth, Australia, has $20,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:

Invest in
Project X Invest in
Project Y
Investment required $ 20,000 $ 20,000
Annual cash inflows $ 6,000
Single cash inflow at the end of 6 years $ 40,000
Life of the project 6 years 6 years


The company’s discount rate is 16%.


Required:


a.
Determine the net present values. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)

Now: 1 2 3 4 5 6

Project X:
Annual Cash Inflows:
Total Cash Flows:
Discount Factor (16%):
Present Value:
Net Present Value:

Project Y:
Annual Cash Inflows:
Total Cash Flows:
Discount Factor (16%):
Present Value:
Net Present Value:

b. Which alternative would you recommend that the company accept?
Project X
Project Y

Answer 1

Project X:

Annual Cash Inflows: $6,000

Total Cash Flows: $16,000

Discount Factor (16%):

Present Value: $22,108.42

Net Present Value: $2,108.42

Project Y:

Annual Cash Inflows: $40,000

Total Cash Flows: $20,000

Discount Factor (16%):

Present Value: $16,417.69

Net Present Value: $-3,582.31

Project x should be chosen

Step-by-step explanation:

Net present value is the present value of after tax cash flows from an investment less the amount invested.

Present value is the sum of cumulative discounted cash flows.

NPV and present value can be calculated using a financial calculator:

For project X,

Cash flow for year 0 = -20,000

Cash flow each year from year 1 to 6 = $6,000

I = 16%

Present Value: $22,108.42

Net Present Value: $2,108.42

For project Y,

Cash flow in year 0 = -$20,000

Cash flow each year from year 1 to 5 = 0

Cash flow in year 6 = $40,000

Present Value: $16,417.69

Net Present Value: $-3,582.31

Project X should be chosen because the NPV is postive.

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you