Answer to Question #59003 in Other Economics for David Jones

Question #59003
ZZZ Company has $15,000 to invest. Management is trying to decide between two alternative uses for the funds as follows. The company’s discount rate is 16% Project A Project B Investment required $15,000 $15,000 Single cash inflow at the end of 10 years $0 $60,000 Annual cash inflows $4,000 $0 Life of the project 10 years 10 years Which alternative would the company choose and why?
1
Expert's answer
2016-04-12T09:05:04-0400
For project X:
Net present value (NPV)=4000*{1/0.16-1/0.16(1+0.16)10}-15000
NPV=$19360-$15000
NPV=$4360

For Project Y:
NPV=$60000/(1+0.16)10-$15000
NPV=$13605.44-$15000
NPV=-$1394.56

In this case the company should choose the project X as it is more profitable.

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