smonalisa97
Answered

Westonci.ca is the premier destination for reliable answers to your questions, brought to you by a community of experts. Our platform provides a seamless experience for finding reliable answers from a knowledgeable network of professionals. Get detailed and accurate answers to your questions from a dedicated community of experts on our Q&A platform.

A company is considering to choose between two investment projects with the
following details.
Project A : Costs RM7 million in upfront costs and will generate RM3 million in
annual income for five years starting three years from now.
Project B : Costs RM2.5 million upfront and RM2 million in each of the next
three years. This project generates no annual income but will be sold
six years from now for a sales price of RM16 million.
By using Net Present Value approach, with a discount rate of 8%, determine
which project should be choosen by the company.​

Sagot :

Parrain

Answer: Project A should be chosen as it has the highest NPV.

Step-by-step explanation:

Project A

Present value of inflows:

First find the present value of inflows 3 years from today. Bear in mind that the inflow is constant so this is an annuity:

= 3 million * Present value interest factor of annuity, 8%, 5 years

= 3 million * 3.9927

= RM11,978,100

Discount this value to the present:

= 11,978,100 / (1 + 8%)³

= RM9,508,602

Net Present value = Present value of inflows - Investment

= 9,508,601 - 7,000,000

= RM2,508,601

Project B:

Find present value of costs:

= 2,500,000 +  (2 million * Present value interest factor of annuity, 3 years, 8%)

= 2,500,000 + (2,000,000 * 2.5771)

= 2,500,000 + 5,154,200

= RM7,654,200

Net present value = (16,000,000 / (1 + 8%)⁶) - 7,654,200

= RM2,428,514

Project A should be chosen as it has the highest NPV.

View image Parrain
We hope you found what you were looking for. Feel free to revisit us for more answers and updated information. We hope you found this helpful. Feel free to come back anytime for more accurate answers and updated information. Thank you for trusting Westonci.ca. Don't forget to revisit us for more accurate and insightful answers.