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.

answer is i don't know