Homework SourseConsider projects A and B with the following cash flows a1 W
Consider projects A and B with the following cash flows:
a-1. What is the NPV of each project if the discount rate is 15%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
| C0 | C1 | C2 | C3 | |||||||||||||||||
| A | ? | $ | 45 | + | $ | 31 | + | $ | 31 | + | $ | 31 | ||||||||
| B | ? | 70 | 35 | 35 | 35 | |||||||||||||||
Solution
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
A:
Present value of inflows=31/1.15+31/1.15^2+31/1.15^3
=$70.78
NPV=Present value of inflows-Present value of outflows
=$70.78-$45
=$25.78(Approx).
B:
Present value of inflows=35/1.15+35/1.15^2+35/1.15^3
=$79.91
NPV=Present value of inflows-Present value of outflows
=$79.91-$70
=$9.91(Approx).
