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Your company is considering investing in one of two mutually exclusive projects. The cost of capital...

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Finance

Your company is considering investing in one of two mutuallyexclusive projects. The cost of capital is 11%. The first projectHas $25,000 annual cash inflows, a 10-year life, and will cost$120,000 at time zero. The second project has a 7-year life, Annualcash inflows of $20,000 per year, and a cost of $75,000 at timezero. Which project has the highest NPV. Assuming that theseprojects will most likely be repeated indefinitely into the future,which project would add the most value to the company? Justify youranswer using the EAA

Answer & Explanation Solved by verified expert
4.5 Ratings (671 Votes)

First Project
Annual Cash Flow 25000
Life 10 Years
Cost 120000
Amounts in $
SO Year Cash Flow PVF@ 11% Discounted Value
0       (120,000)                 1.00              (120,000)
1-10            25,000                 5.89                147,230
NPV                  27,230
Second Project
Annual Cash Flow 20000
Life 7 Years
Cost 75000
Amounts in $
SO Year Cash Flow PVF@ 11% Discounted Value
0          (75,000)                 1.00                (75,000)
1-10            20,000                 4.71                  94,244
NPV                  19,244
Project One will give has the Highest NPV
Project one will give most value to the company
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