Question

Giant Equipment Ltd. is considering two projects to invest next year. Both projects have the same start-up costs. Project A will produce annual cash flows of $42,000 at the beginning of each year for eight years. Project B will produce cash flows of $48,000 at the end of each year for seven years. The company requires a 12% return. Required: a) Which project should the company select and why? b) Which project should the company select if the interest rate is 14% at the cash flows in Project B is also at the beginning of each year?

Answer 1

(a)The company should select project A because it's PV of cash flow is higher. (b)The PV of cash flow is higher in project B, therefore the project B should be selected

Step-by-step explanation:

Solution

(a) For project A, the PV of cash flow from the beginning of each year is

PMT/i [1- (1+i)^⁻n] (1 +i)

= 4200/0.12 [1 - (1.12)^⁻8] *1.12

= $ 233,677.77

for project B, PV of cash flows at the end of each year is:

PMT/i [1- (1+i)^⁻n] (1 +i)

= 4800/0.12 [1 - (1.12)^⁻7] *

=$ 219, 060.31

Therefore, the company should select project A because it's pv of cash flow is higher.

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