Question

Giant Equipment Ltd. is considering two projects to invest next year. Both projects have the same start-up costs. Project A will produce annual cash flows of $42,000 at the beginning of each year for eight years. Project B will produce cash flows of $48,000 at the end of each year for seven years. The company requires a 12% return.
a)Which project should the company select and why
b)Which project should the company select if the interest rate is 14% at the cash flows in Project B is also at the beginning of each year

Answer 1

Answer:

Using 12% MARR project A is preferred as it has a higher present worth

Using 14% MARR project B is preferred as it has a higher present worth

Explanation:

In deciding the project to choose,both projects' present values can be computed and the project with a present worth is selected.

=-pv(rate,nper,pmt,fv,type)

the rate is the required rate of return of 12%

nper is the duration of the investment

pmt is the annual cash flow of the project

fv is the future worth of the investment,it is not known hence taken as zero.

type is 0 if cash flow at year end and 1 if cash flow is at the beginning of the year

Project A:

=-pv(12%,8,42000,0,1)=$233,677.77  

Project B:

=-pv(12%,7,48000,0,0)=$219,060.31  

Project A:

=-pv(14%,8,42000,0,1)=$ 222,108.80  

Project B:

=-pv(14%,7,48000,0,1)=$ 234,656.04