Question

Compute PW(15%) for project A1. Compute the unknown cash flow X in years 2 and 3 for project A2. Compute the project balance (at 15%) of project A1 at the end of period 3. If these two projects are mutually exclusive alternatives, which one would you select

Answer 1

a. The present value of the Project A1 is $7,643.69

b. The value of X is $24,264.29

c. The project balance for project A1 at the end of year 3 is $11,625.29

d. Project A2 should be selected

Step-by-step explanation:

Note: The complete question is attached below

a. PV = -P + ∑F/(1+i)^n

Pv = -15,000 + 9,500/(1+0.15)^1 + 12500/(1+0.15)^2 + 7500/(1+0.15)^3

PV = -15,000 + 9500/1.15 + 12500/1.3225 + 7500/1.5209

PV = -15000 + 8261.2 + 9451.24 + 4931.25

PV = $7,643.69

The present value of the Project A1 is $7,643.69

b. It is given thar PV worth A2 = 9300, initial investment 25000, rate of interest = 15%

PV = -P + ∑F/(1+i)^n

Pv = -25000 + 0/(1+0.15)^1 + X/(1+0.15)^2 + X/(1+0.15)^3

9,300 = -25000 + 0 + X/1.3225 + X/1.5209

9,300 + 25000 = 0.7561(X) + 0.6575(X)

34300 = 1.4136(X)

X = 34300 / 1.4136

X = $24,264.29

The value of X is $24,264.29

c. Future value = Present value(1+i)^n

Future value = 7643.69*(1+0.15)^3

Future value = 7643.69*1.5209

Future value = 11,625.29

The project balance for project A1 at the end of year 3 is $11,625.29

d. Since the PV of project A2 ($9,300) is greater than the pre project($7643.69), Project A2 should be selected