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Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment....

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Accounting

Keller Construction is considering two new investments. ProjectE calls for the purchase of earthmoving equipment. Project Hrepresents an investment in a hydraulic lift. Keller wishes to usea net present value profile in comparing the projects. Theinvestment and cash flow patterns are as follows: Use Appendix Bfor an approximate answer but calculate your final answer using theformula and financial calculator methods.
  

Project EProject H
($37,000 Investment)($35,000 Investment)
YearCash FlowYearCash Flow
1$9,0001$17,000
212,000218,000
318,000317,000
420,000


a. Determine the net present value of the projectsbased on a zero percent discount rate.


Project E - ____________________

Project H - _____________________

b. Determine the net present value of the projectsbased on a discount rate of 9 percent. (Do not roundintermediate calculations and round your answers to 2 decimalplaces.)
  

Project E - ____________________

Project H - _____________________

c. If the projects are not mutually exclusive,which project(s) would you accept if the discount rate is 9percent?
  

Project E
Project H
Both H and E

Answer & Explanation Solved by verified expert
3.7 Ratings (619 Votes)

Net present value (NPV) = Present value of cash inflow - present value of cash outflow.

Cash flow Discounted cash flow
1 2 3 4 5
Year Project E Project H Discount rate @9% Project E (1*3) Project H (2*3)
0 ($37,000) ($35,000) 1 ($37,000) ($35,000)
1 $9,000 $17,000 0.9174 $8,256.60 $15,595.80
2 $12,000 $18,000 0.8417 $10,100.4 $15,150.60
3 $18,000 $17,000 0.7722 $13,899.6 $13,127.40
4 $20,000 $0 0.7084 $14,168 $0
NPV at 0% $22,000 $17,000 NPV at 9% $9,424.60 $8,873.80

a) Determine the net present value of the projects based on a zero percent discount rate.

Project E $22,000
Project H $17,000

b) Determine the net present value of the projects based on a discount rate of 9 percent.

Project E $9,424.60
Project H $8,873.80

c)  If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 9 percent?

Both H and E.
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