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Homework answers / question archive / Use the net present value technique to evaluate the following two projects and advice management on which one to choose
Use the net present value technique to evaluate the following two projects and advice management on which one to choose. Use a discount rate of 13.5%.
|
YEAR |
PROJECT A |
PROJECT B |
|
0 |
(120,000) |
(120,000) |
|
1 |
30,500 |
51,000 |
|
2 |
32,500 |
45,000 |
|
3 |
64,500 |
12,600 |
|
4 |
39,471 |
17,000 |
Your PVIF should be approximated to 4 decimal places.
| Statement showing Cash flows | Project A | Project B | ||||
| Particulars | Time | PVf 13.5% | Amount | PV | Amount | PV |
| Cash Outflows | - | 1.00 | (120,000.00) | (120,000.00) | (120,000.00) | (120,000.00) |
| PV of Cash outflows = PVCO | (120,000.00) | (120,000.00) | ||||
| Cash inflows | 1.00 | 0.8811 | 30,500.00 | 26,873.55 | 51,000.00 | 44,936.10 |
| Cash inflows | 2.00 | 0.7763 | 32,500.00 | 25,229.75 | 45,000.00 | 34,933.50 |
| Cash inflows | 3.00 | 0.6839 | 64,500.00 | 44,111.55 | 12,600.00 | 8,617.14 |
| Cash inflows | 4.00 | 0.6026 | 39,471.00 | 23,785.22 | 17,000.00 | 10,244.20 |
| PV of Cash Inflows =PVCI | 120,000.07 | 98,730.94 | ||||
| NPV= PVCI - PVCO | 0.07 | (21,269.06) | ||||
| Management should choose project A since NPV is greater than 0.Project B shouldbe rejected since NPV is negative | ||||||
| Further there can be soft benefits associated with project | ||||||
| Soft benefits means those benefits whose quantitative value cannot be measured. We generally dont assign value to the soft benefits which occur as a result of investment,.For Eg . Consider the ERP example and the “soft benefit” of being able to close the books in five days rather than three weeks.It is one thing to include soft benefits in analyzing investment opportunities but it is sometimes quite another to quantify those benefits. It may be too costly to determine those benefits. |
