Question

Labeau Products, Ltd., of Perth, Australia, has $25,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:
Invest in Project X Invest in Project Y
Investment required $ 25,000 $ 25,000
Annual cash inflows $ 8,000
Single cash inflow at the end of 6 years $ 60,000
Life of the project 6 years 6 years
The company’s discount rate is 16%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the net present value of Project X.
2. Compute the net present value of Project Y.
3. Which project would you recommend the company accept?

Answer 1

Answer:

Plese see explanation

Explanation:

1. Net present value of project X

Year                 Cash flow          Present value at 16%

0                       (25,000)                  (25,000)

1-6                      8,000                    29,477.89

Net present value=                         $4,477.89

2. Net present value of project Y

Year                 Cash flow          Present value at 16%

0                       (25,000)                  (25,000)

6                       60,000                  24,626.54

Net present value=                         ($373.46)

3. I will recommend Labeau Products, Ltd to invest in project X instead of project Y because the net present value of project X is positive and project x will increase the wealth of shareholders of the  Labeau Products, Ltd by $4,477.89