You are asked to evaluate the following two projects for the Norton corporation. Use a discount...

3.6 Ratings (668 Votes)


Project X
Discount rate	0.12
Year	0	1	2	3	4
Cash flow stream	-48000	24000	22000	23000	22600
Discounting factor	1	1.12	1.2544	1.404928	1.5735194
Discounted cash flows project	-48000	21428.57	17538.27	16370.95	14362.709
NPV = Sum of discounted cash flows
NPV Project X =	21700.49
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

PI= (NPV+initial inv.)/initial inv.
=(21700.49+48000)/48000
1.45

b

Project Y
Discount rate	0.12
Year	0	1	2	3	4
Cash flow stream	-68000	34000	27000	28000	30000
Discounting factor	1	1.12	1.2544	1.404928	1.5735194
Discounted cash flows project	-68000	30357.14	21524.23	19929.85	19065.542
NPV = Sum of discounted cash flows
NPV Project Y =	22876.77
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

PI= (NPV+initial inv.)/initial inv.
=(22876.77+68000)/68000
1.34

Choose Project X as it has higher PI

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Project X (Videotapes of the Weather Report) ($48,000 Investment)		Project Y (Slow-Motion Replays of Commercials) ($68,000 Investment)
Year	Cash Flow		Year	Cash Flow
1	$	24,000			1	$	34,000
2		22,000			2		27,000
3		23,000			3		28,000
4		22,600			4		30,000

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