Question

You work at a construction company with a stated cost of capital of 12%. Your company is currently deciding between two different projects. Project A will pay you $800,000 up front and $1.5 million after 4 years. You will have to spend $300,000 now, and $400,000 once a year for the next 4 years. Project B will pay you $1.2 million up front and cost you $1.1 million in 4 years.
A. What is the net present value of Project A?
B. What is the net present value of Project B?

Answer 1

Answer:

$1,453,277.12

$1,899.069.89

Explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator  

Project A

Cash flow in year 0 = $800,000 - $500,000 = $300,000

Cash flow in year 1 = 0

Cash flow in year 2 =0

Cash flow in year 3 =0

Cash flow in year 4 = 1.5 million

NPV =

Poject B

Cash flow in year 0 = $1.2 MILLION

Cash flow in year 2 =0

Cash flow in year 3 =0

Cash flow in year 4 = -1.1 MILLION

NPV =

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

To find the NPV 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.  

3. Press compute