Two projects being considered have the following projected cash flows: What is the NPV of Project...

Question:

Two projects being considered have the following projected cash flows:

Year Project A Project B
0 -100,00 -100,000
1 50,000 10,000
2 40,000 30,000
3 30,000 40,000
4 10,000 60,000

What is the NPV of Project B if the cost of capital were 15%?

A. -$18,750 B.$4,917.70

C. $40,000.00 D. -$8,014.19

Given -

• Initial Investment = $100,000 • Cost of Capital = 15% First we need to find the present value of cash inflow from Year 1 to Year 4 • Present Value of Year 1 Cash Flows = Cash Flow / ( 1 + r ) ^ t = 10000 / ( 1 + 0.15 ) ^ 1 =$8,695.65
• Present Value of Year 2 Cash Flows = Cash Flow / ( 1 + r ) ^ t = 30000 / ( 1 + 0.15 ) ^ 1 = $22,684.31 • Present Value of Year 3 Cash Flows = Cash Flow / ( 1 + r ) ^ t = 40000 / ( 1 + 0.15 ) ^ 1 =$26,300.65
• Present Value of Year 4 Cash Flows = Cash Flow / ( 1 + r ) ^ t = 60000 / ( 1 + 0.15 ) ^ 1 = $34,305.19 Therefore, • Present Value of Cash Flows from Year 1 to Year 4 = 8,695.65 + 22,684.31 + 26,300.65 + 34,305.19 =$91,985.81

The net present value can be calculated as follows -

• Net Present Value = Present Value of Cash Inflows - Initial Investment

Or,

• Net Present Value = 100000 - 91985.81

Or,

• Net Present Value = -$8,014.19 Therefore, • Correct answer is Option (D) -$8,014.19