Company received the approval to start no more than two projects in the current calendar year. Three different projects

Question

Company received the approval to start no more than two projects in the current calendar year. Three different projects were recommended, each of which requires an investment of 1,000 to be made at the beginning of year 1 The cash flows for each of the three projects are as follows: End of year Project A Project Project 200 SOD 400 500 300 250 1200 175 100 200 1 300 150 300 500 700 The company uses an annual effective interest rate of to discount its cash flows Determine which combination of projects the company should Projects Project O Project C Project Band Project A and

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rate positively . i ii iii iv v=i*iv vi=ii*iv vii=iii*iv Present value Year Project A Project B Project C PVIF @ 5% Project A Project B Project C 0 -1000 -1000 -1000 1 (1,000) (1,000) (1,000) 1 200 500 400 0.952381 190 476 381 2 500 300 250 0.907029 454 272 227 3 200 -175 100 0.863838 173 (151) 86 4 -300 150 -200 0.822702 (247) 123 (165) 5 300 600 700 0.783526 235 470 548 NPV= (195) 191 78 We can see that project B and C has positive NPV ans = Project B and C

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Company received the approval to start no more than two projects in the current calendar year

Expert Solution

Archived Solution

	i	ii	iii	iv	v=i*iv	vi=ii*iv	vii=iii*iv
					Present value
Year	Project A	Project B	Project C	PVIF @ 5%	Project A	Project B	Project C
0	-1000	-1000	-1000	1	(1,000)	(1,000)	(1,000)
1	200	500	400	0.952381	190	476	381
2	500	300	250	0.907029	454	272	227
3	200	-175	100	0.863838	173	(151)	86
4	-300	150	-200	0.822702	(247)	123	(165)
5	300	600	700	0.783526	235	470	548
NPV=					(195)	191	78

We can see that project B and C has positive NPV

ans = Project B and C