Answer to Question #59003 in Economics for David Jones

Question

ZZZ Company has $15,000 to invest. Management is trying to decide between two alternative uses for the funds as
follows. The company’s discount rate is 16%
Project A Project B
Investment required $15,000 $15,000
Single cash inflow at the end of 10 years $0 $60,000
Annual cash inflows $4,000 $0
Life of the project 10 years 10 years
Which alternative would the company choose and why?

Answer 1

For project X:
Net present value (NPV)=4000*{1/0.16-1/0.16(1+0.16)10}-15000
NPV=$19360-$15000
NPV=$4360

For Project Y:
NPV=$60000/(1+0.16)10-$15000
NPV=$13605.44-$15000
NPV=-$1394.56

In this case the company should choose the project X as it is more profitable.