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Projects A and B both have an initial outflow of $100,000. Project A will return a cash flow of $30,000 each year for the next 5 years. Project B will return $40,000 in year 1, $30,000 in year 2, $30,000 in year 3, $30,000 in year 4, and $20,000 in year 5. Which project will have the higher net present value

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Answer:

This question is incomplete. The discount rate was not given. Thus, a discount rate of 10% is assumed.

PROJECT A

Year    Cashflow   DF@10%    PV      

                $                              $

0        (100,000)      1            (100,000)

1          30,000      0.9091      27,273

2         30,000      0.8264      24,792

3         30,000      0.7513        22,539

4         30,000      0.6830       20,490

5         30,000      0.6209       18,627

                                        NPV 13,721

PROJECT B

Year    Cashflow   DF@10%    PV

                 $                              $

0           (100,000)       1         (100,000)

1              40,000    0.9091    36,364

2             30,000    0.8264    24,792

3             30,000    0.7513      22,539

4              30,000   0.6830     20,490

5              20,000   0.6209     12,418

                                      NPV   16,603

Product B has a higher NPV

Explanation:

In this case, we will discount the cashflows for each year at 10%. Then, we will determine the present value of cash inflows by multiplying the cash inflows by discount factor. Thereafter, we will deduct the initial outlay from the present value of cash inflows so as to obtain the net present value.

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