Question #273439

Company uses a 10% interest rate for all capital expenditures and has done the following analysis for four projects for the upcoming year:

Project A

Initial capital outlay $200,000

Annual net cash inflows Year1 65,000 - Year2 70,000 - Year3 80,000 - Year4 40,000

Project B

Initial capital outlay $298,000

Annual net cash inflows Year1 100,000 - Year2 135,000 - Year3 90,000 - Year4 65,000

Project C

Initial capital outlay $248,000

Annual net cash inflows Year1 80,000 - Year2 95,000 - Year3 90,000 - Year4 80,000

Project D

Initial capital outlay $272,000

Annual net cash inflows Year1 95,000 - Year2 125,000 - Year3 90,000 - Year4 60,000

a) You are required to select one of the above projects using Accounting Rate of Return; Payback Period; Net Present Value.

b) Which project(s) company should undertake using NPV if it has 500,000 funds available?

Expert's answer

a)

Net Present Value:

"NPV=\\sum\\frac{CF_t}{(1+r)^t}=13000"

where CF_{t }is cash inflow during a single period t,

r is internal rate of return

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