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Net present value—unequal lives Project 1 requires an original investment of $125,000. The project will yield cash flows of $50,000 per year for 10 years. Project 2 has a calculated net present value of $155,000 over an eight-year life. Project 1 could be sold at the end of eight years for a price of $8,000. (A) Determine the net present value of Project 1 over an eight-year life, with residual value, assuming a minimum rate of return of 12%. (B) Which project provides the greatest net present value?

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Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207

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Chapter
Section
BuyFindarrow_forward

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207
Chapter 25, Problem 25.5BE
Textbook Problem
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Net present value—unequal lives

Project 1 requires an original investment of $125,000. The project will yield cash flows of $50,000 per year for 10 years. Project 2 has a calculated net present value of $155,000 over an eight-year life. Project 1 could be sold at the end of eight years for a price of $8,000. (A) Determine the net present value of Project 1 over an eight-year life, with residual value, assuming a minimum rate of return of 12%. (B) Which project provides the greatest net present value?

(a)

To determine

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

To determine: The net present value of the Project 1 over an eight year life.

Explanation of Solution

The net present value of the project is $126,632.

Working Note:

Calculation of NPV of the Project 1:

NPV=(Presentvalueofcashflows)-(Initialcashoutlay)={($50,000×4.968)+($8,000×0

(b)

To determine
The project that provides the greatest net present value.

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Chapter 25 Solutions

Financial & Managerial Accounting
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