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Net present value—unequal lives Project A requires an original investment of $32,600
Net present value—unequal lives
Project A requires an original investment of $32,600. The project will yield cash flows of $7,000 per year for nine years. Project B has a computed net present value of $3,500 over a six-year life. Project A could be sold at the end of six years for a price of $15,000.
(a) Using the present value tables in Exhibits 2 and 5, determine the net present value of Project A over a six-year life, with residual value, assuming a minimum rate of return of 12%.
Expert Solution
Computation of Net present value of Project A over a six-year life, with residual value:
Present value of cash inflows of $7,000 over 6 years = $7,000*Annuity factor(6 years,12%)
= $7,000*4.111 = $28,780
Present value of sale of project 1 at the end of 6years = Sale value*PVF(6 years,12%)
= $15,000*0.507 = $7599
Present value of cash outflow = $32,600
Total Present value of cash inflows = $28,780+$7,599 = $36,379
Net present value of project 1 for 6 years = PV of cash inflows - PV of cash outflows
= $36,379 - $32,600
= $3,779
So, Net present value of Project A over a six-year life, with residual value is $3,779.
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