Consider the following cash flows on two mutually exclusive projects:  YearProject AProject B0    –$56,000    –$71,000  1   36,000   35,000   2   31,000   44,000  3    26,000   47,000     The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 3 percent.  Calculate the NPV for each project. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV FOR PROJECT A:NPV FOR PROJECT B:

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Asked Nov 11, 2019
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Consider the following cash flows on two mutually exclusive projects:
 
 
Year Project A Project B
0     –$ 56,000     –$ 71,000  
1     36,000     35,000  
 2     31,000     44,000  
3      26,000     47,000  
 

  

The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 3 percent.

  

Calculate the NPV for each project. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

 

NPV FOR PROJECT A:
NPV FOR PROJECT B:


 

 

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Expert Answer

Step 1

Cash flows given for project A are in real terms, so real discount rate should be used to calculate their present value. This can be done by considering inflation in the calculation.

The net present value for project A can be calculated with the help of below expression:

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1st year cash inflow x (1+ e) (1+d) -Initial cash outflow + 2nd year cash inflowx (1+e) (1+d) 3rd year cash inflow x (1 + e) (1+d)' Project A NPV +

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Step 2

The net present value for project A is calculated below:

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$36, 000 x (1+3%) (1+12%) -$56,000 Project A NPV | $31,000x (1+3%) $26,000x(1+3%) (1+12%) =-S56,000 $33,107. 14+ $26,218.03+ $20,222.31 (1+1296) =$23,547.48

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Step 3

Cash flows given for project B are in nominal terms, so given nominal discount rate should be used to calculate their...

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1st year cash inflow -Initial cash outflow + (1+d) 2nd year cash inflow + (1+d) Project B NPV 3rd year cash inflow (1+d)

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