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21 June, 16:50

Hittle Company is considering two mutually exclusive projects X and Y. The cost of capital for each project is 10%. The projects' expected net cash flows are as follows: Year Project X Project Y 0 - $10,000 - $10,000 1 4,500 3,500 2 3,000 3,500 3 3,000 3500 4 3000 3500 5 3600 3500 What are the correct NPVs of projects X and Y, respectively?

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  1. 21 June, 19:47
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    Project X:

    NPV = $3108,55

    Project Y

    NPV = $3267,75

    Explanation:

    Giving the following information, we need to find the net present values of both projects:

    Project X:

    i=0,10

    Cash flow=

    0 = - $10,000

    1 = 4,500

    2 = 3,000

    3 = 3,000

    4 = 3000

    5 = 3600

    Project Y:

    i = 0,10

    Cash flow=

    0 = - $10,000

    1=3,500

    2=3,500

    3=3500

    4=3500

    5=3500

    The NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

    The formula is:

    n

    NPV = ∑ [Rt / (1+i) ^t]

    t-1

    where:

    R t = Net cash inflow-outflows during a single period t

    i=Discount rate of return that could be earned in alternative investments

    t=Number of timer periods

    In this exercise:

    Project X:

    NPV = - 10000 + (4500/1,10^1) + (3000/1,10^2) + (3000/1,10^3) + (3000/1,10^4) + (3600/1,10^5) = $3108,55

    Project Y

    NPV = $3267,75
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