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 |
| 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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