Question

A firm, with an 18% cost of capital, is considering thefollowing projects (on January 1, 2011):Jan. 1, 2011, Cash outflow (000's omitted)Dec. 31, 2015, Cash inflow (000's omitted)Project internal rate of returnProject A $3,500 $7,400 15%Project B 4,000 9,950 ?Present Value of $1 Due at End of "N" PeriodsN 12% 14% 15% 16% 18% 20% 22%4 .6355 .5921 .5718 .5523 .5158 .4823 .42305 .5674 .5194 .4972 .4761 .4371 .4019 .34116 .5066 .4556 .4323 .4104 .3704 .3349 .2751Using the net present value method, Project A's netpresent value isa. $316,920b. $0c. $(265,460)d. $(316,920)

Answer 1

Answer:

c. $(265,460)

Explanation:

The net present value of Project A shall be determined as needed.

The cash inflow of 31 December 2015 is five years from the current cash outflow and the net present value method uses the 18 per cent capital cost of the company.

The current value factor for 18 percent for 5 years is.4371, and $7.400,000 times.4371 is equivalent to $3.234.540, which is $265.460 lower than the current cash outflow of $3.5 million.