Keller construction is considering two new investments. project e calls for the purchase of earthmoving equipment. project h represents an investment in a hydraulic lift. keller wishes to use a net present value profile in comparing the projects. the investment and cash flow patterns are as follows:
project e ($23,000 investment)
year cash flow
1 $ 5,000
2 6,000
3 7,000
4 10,000
project h ($25,000 investment)
year cash flow
1 $ 16,000 2 5,000 3 4,000 required:
a. determine the net present value of the projects based on a zero percent discount rate.
b. determine the net present value of the projects based on a 9 percent discount rate.

USING 0% DISCOUNT RATE

PROJECT E

YearCashflow[email protected]%     PV

             $                  $

0            (23,000)1  (23,000)

1             5,000         1         5,000

2                  6000           1              6,000

3      7000          1              7,000

4                 10,000           1              10,000

                                               NPV  5,000

                   PROJECT H

YearCashflow[email protected]%     PV

             $                  $

0            (25,000)1  (23,000)

1             16,0001         16,000

2                  5,000          1              5,000

3      4,000          1              4,000

                                               NPV  2,000

Project A should be accepted

USING 9% DISCOUNT RATE

YearCashflow[email protected]%           PV

             $                      $

0            (23,000)1        (23,000)

1             5,000         0.9174         4,587

2                  6000           0.8462            5,077

3      7000          0.7722             5,405

4                 10,000           0.7084            7,084

                                                       NPV   (847)

PROJECT H

YearCashflow[email protected]%            PV

             $                        $

0            (25,000)1         (23,000)

1             16,0000.9714         15,542

2                  5,000          0.8462            4,231

3      4,000          0.7722            3,089

                                                     NPV    (138)

None of the projects should be accepted because they have negative NPV

Explanation:

The question requires the computation of NPV using 0% and 9%.

The cashflows of the two projects will be discounted at 0% and 9%.

The discount factors for each project can be calculated using the formula (1+r)-n. The cashflows of the projects will be multiplied by the discount factors to obtain the present values. NPV is the difference between present values of cash inflows and initial outlay.