Question

You are considering two projects. Project 1 currently costs $15 million, which is to be paid this year; the returns are $9 million after year one and $5 million after year two. Project 2 currently costs $13 million, again to be paid this year; the returns are $10 million after year one and $6 million after year two. At an interest rate of 8%, the difference between the present value of Project 1's future revenues and Project 1's current costs is equal to , while the difference between the present value of Project 2's future revenues and Project 2's current costs is equal to . (Hint: Round intermediate calculations to two decimal places.)

Answer 1

Answer:

$-2.38 million

$1.40 million

Explanation:

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Project 1

cash flow in year 1 = 9 million

cash flow in year 2 = 5 million

i = 8%

pv = 12.6

12.6 - 15 = -2.38

Project 2

cash flow in year 1 = 10 million

cash flow in year 2 = 6 million

i = 8%

pv = 14.40

14,40 - 13 = 1.40

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.