Trevoline Company is deciding between two projects. Each project requires an initial investment of $350,000. The projected net cash flows for the two projects are listed below. The revenue is to be received at the end of each year. Trevoline requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity factors for 10% are presented below. Use net present value to determine which project should be pursued and explain why.?Project AProject BPresent ValuePresent Value of anPeriodsCash FlowsCash Flowsof 1 at 10%Annuity of 1 at 10%1$50,000$160,0000.90910.90912$200,000$175,0000.82641.73553$250,000$175,0000.75132.4869
What will be an ideal response?
| ? | Project A | ? | Project B | ? |
| ? | PV of cash flows | ? | PV of cash flows | ? |
| Year 1 | $45,455 | ? | $145,456 | ? |
| Year 2 | 165,280 | ? | 144,620 | ? |
| Year 3 | 187,825 | ? | 131,478 | ? |
| Total | 398,560 | ? | 421,554 | ? |
| Amount invested | 350,000 | ? | 350,000 | ? |
| Net present value | $48,560 | ? | $71,554 | ? |
Both projects have a positive net present value which means that both projects would generate more than a 10% return. However, if only one project can be chosen, it should be Project B. It provides the higher net present value and also the cash inflows are higher in the first year which means the company would recover the cost of the project sooner.
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