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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Net present value—unequal lives

Project 1 requires an original investment of $55,000. The project will yield cash flows of $15,000 per year for seven years. Project 2 has a calculated net present value of $5,000 over a four-year life. Project 1 could be sold at the end of four years for a price of $38,000. (a) Determine the net present value of Project 1 over a four-year life, with residual value, assuming a minimum rate of return of 20%. (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 a four year life.

Explanation

The net present value of the project is $2,151.

Working Note:

Calculation of NPV of the Project 1:

NPV=(Presentvalueofcashflows)-(Initialcashoutlay)={($15,000×2.589)+($38,000×0

(b)

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

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