A company is considering two alternative investment opportunities, each of which requires an initial cash outlay of $110,000. The expected net cash flows from the two projects follow:   Project A Project Z  Year 1 ……………… $ 30,000$ 44,000Year 2 ………………44,000 70,000Year 3………………   70,000  30,000Totals ………………  $144,000$144,000 Based on a comparison of their net present values, and assuming the same discount rate of 12% is required for both projects, which project is the better investment? Use the table values below to compute the net present value of each project's cash flows.Periods Present value of 1 at 12%1……………….0.89292……………….0.79723……………….0.7118

What will be an ideal response?


Project A

0.8929 * $30,000 =$ 26,787
0.7972 * 44,000 =  35,077
0.7118 * 70,000 =   49,826
Total ……………………………  $111,690
Initial cost ……………………...  (110,000)
Net present value ………………  $ 1,690
Project Z
0.8929 * $44,000 =$ 39,288
0.7972 * 70,000 =  55,804
0.7118 * 30,000 =   21,354
Total ……………………………  $116,446
Initial cost ……………………...  (110,000)
Net present value ………………  $ 6,446

Select Project Z. Its NPV is higher due to higher cash flows in the first and second year.

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