Question

Phoenix Company can invest in each of three cheese-making projects: C1, C2, and C3. Each project requires an initial investment of $288,000 and would yield the following annual cash flows. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) C1 C2 C3 Year 1 $ 32,000 $ 116,000 $ 200,000 Year 2 128,000 116,000 80,000 Year 3 188,000 116,000 68,000 Totals $ 348,000 $ 348,000 $ 348,000 (1) Assume that the company requires a 9% return from its investments. Using net present value, determine which projects, if any, should be acquired. (Negative net present values should be indicated with a minus sign. Round your answers to the nearest whole dollar.)

Answer 1

Answer:

Only projects C2 and C3 should be carried out since their net present value is positive  ($5,630 and $15,329 respectively). While project C1 should be rejected because its NPV is negative.

Explanation:

                                             C1                    C2                     C3

initial investment            -$288,000     -$288,000       -$288,000

cash flow 1                          $32,000       $116,000         $200,000

cash flow 2                        $128,000       $116,000           $80,000

cash flow 3                        $188,000       $116,000           $68,000

total                                   $348,000      $348,000        $348,000

required rate of return =9%

NPV                                      -$5,737            $5,630            $15,329

NPV C1 = -$288,000 + $32,000/1.09 + $128,000/1.09² + $188,000/1.09³ = -$5,737

NPV C2 = -$288,000 + $116,000/1.09 + $116,000/1.09² + $116,000/1.09³ = $5,630

NPV C3 = -$288,000 + $200,000/1.09 + $80,000/1.09² + $68,000/1.09³ = $15,329