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Campbell Industries has two potential projects with an initial cost of $1,500,000
Campbell Industries has two potential projects with an initial cost of $1,500,000. The capital budget for the year will only allow Swanson industries to accept one of the four projects. Given the discount rates and the future cash flows of each project, which project should they accept Note: use NPV and B/C analysis Cash Flanes Year one Year to Year three Year four Year five Discount Rate Projecte $350,000 $350,000 $350,000 $350,000 $350,000 49 Project $400,000 $400,000 $400,000 $400,000 $400,000 89
Expert Solution
Net Present Value (NPV) of the Project-Q
|
Year |
Annual cash flows ($) |
Present Value Factor (PVF) at 4.00% |
Present Value of annual cash flows ($) [Annual cash flow x PVF] |
|
|
|
|
|
|
1 |
350,000 |
0.9615385 |
336,538.46 |
|
2 |
350,000 |
0.9245562 |
323,594.67 |
|
3 |
350,000 |
0.8889964 |
311,148.73 |
|
4 |
350,000 |
0.8548042 |
299,181.47 |
|
5 |
350,000 |
0.8219271 |
287,674.49 |
|
|
|
|
|
|
TOTAL |
1,558,137.82 |
||
|
|
|
|
|
Net Present Value (NPV) = Present value of annual cash inflows – Present Value of cash outflows
= $1,558,137.82 - $1,500,000
= $58,137.82
Net Present Value (NPV) of the Project-R
|
Year |
Annual cash flows ($) |
Present Value Factor (PVF) at 8.00% |
Present Value of annual cash flows ($) [Annual cash flow x PVF] |
|
|
|
|
|
|
1 |
400,000 |
0.9259259 |
370,370.37 |
|
2 |
400,000 |
0.8573388 |
342,935.53 |
|
3 |
400,000 |
0.7938322 |
317,532.90 |
|
4 |
400,000 |
0.7350299 |
294,011.94 |
|
5 |
400,000 |
0.6805832 |
272,233.28 |
|
|
|
|
|
|
TOTAL |
1,597,084.01 |
||
|
|
|
|
|
Net Present Value (NPV) = Present value of annual cash inflows – Present Value of cash outflows
= $1,597,084.01 - $1,500,000
= $97,084.01
DECISION
The “PROJECT-R” should be selected, since it has a higher Net present value of $97,084.01
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