Homework SourseLabeau Products Ltd of Perth Australia has 14000 to invest T
Labeau Products, Ltd., of Perth, Australia, has $14,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:
The company’s discount rate is 18%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the net present value of Project X.
2. Compute the net present value of Project Y.
3. Which project would you recommend the company accept?
| Invest in Project X | Invest in Project Y | |||
| Investment required | $ | 14,000 | $ | 14,000 |
| Annual cash inflows | $ | 5,000 | ||
| Single cash inflow at the end of 6 years | $ | 35,000 | ||
| Life of the project | 6 years | 6 years | ||
Solution
Net present value = Present value of cash inflow-Present value of cash outflow
1) Net present value of project X = (5000*3.498)-14000 = 3490
2) Net present value of project Y = (35000*0.370)-14000 = -1050
3) Project X should be accepted
