Use the net present value technique to evaluate the following two projects and advice management on which one to

Question

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.

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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.

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

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Use the net present value technique to evaluate the following two projects and advice management on which one to choose

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Archived Solution

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.