NPV (net present value) Craig is considering several capital investments for the upcoming year. Use the NPV (net present value) method to determine whether the company should investment in the following independent projects: Project 1 costs $28,000 and offers 8 annual cash flows of $8,600. Craig feels this type of investment should require an annual return of 16% on projects like this. Project 2 costs $35,000 and offers 6 annual cash flows of $12,000. Craig feels this type of investment should require an annual return of 12% on projects like this. Requirements 1. Calculate the NPV of both of these projects 2. What is the maximum acceptable price Craig should pay for each of these projects?
NPV (net present value) Craig is considering several capital investments for the upcoming year. Use the NPV (net present value) method to determine whether the company should investment in the following independent projects: Project 1 costs $28,000 and offers 8 annual cash flows of $8,600. Craig feels this type of investment should require an annual return of 16% on projects like this. Project 2 costs $35,000 and offers 6 annual cash flows of $12,000. Craig feels this type of investment should require an annual return of 12% on projects like this. Requirements 1. Calculate the NPV of both of these projects 2. What is the maximum acceptable price Craig should pay for each of these projects?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
NPV (
Craig is considering several capital investments for the upcoming year. Use the NPV (net present value) method to determine whether the company should investment in the following independent projects:
Project 1 costs $28,000 and offers 8 annual cash flows of $8,600. Craig feels this type of investment should require an annual return of 16% on projects like this.
Project 2 costs $35,000 and offers 6 annual cash flows of $12,000. Craig feels this type of investment should require an annual return of 12% on projects like this.
Requirements
1. Calculate the NPV of both of these projects
2. What is the maximum acceptable price Craig should pay for each of these projects?
![### Net Present Value Analysis for Craig's Design and Landscaping Projects
---
**Objective**: Calculate the Net Present Value (NPV) for both of these projects.
#### Project Analysis Table
|
| Craig's Design and Landscaping | Net Present Value Analysis | Total Present Value |
|--------------------------------|-------------------------------------|----------------------|
| | **Show the formula and your work** | |
**Project A:**
| |
|----------------------------------------|
| |
| |
| |
| |
**Project B:**
| |
|----------------------------------------|
| |
| |
| |
| |
#### Maximum Acceptable Price Calculation
| |
|------------------------------------------------------------------------------|
| **What is the maximum acceptable price Craig should pay for each project?** |
---
### Instructions for Completing the Table
1. **Calculating NPV**:
- Use the formula for Net Present Value (NPV):
\[
NPV = \sum \left( \frac{C_t}{(1 + r)^t} \right) - C_0
\]
Where:
- \(C_t\) = Cash inflow at time \(t\)
- \(r\) = Discount rate
- \(t\) = Time period
- \(C_0\) = Initial investment
- Enter the calculations for each cash inflow and the discount rate used in the respective rows for Project A and Project B.
2. **Determining the Maximum Acceptable Price**:
- After calculating the total present value of future cash inflows, compare it with the initial investment to determine if the project is viable.
- The maximum acceptable price Craig should pay for each project is equivalent to the calculated NPV, ensuring that the NPV remains positive.
---
By following these steps, you will be able to determine the financial viability of the projects Craig is considering, ensuring his investment leads to the desired return.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F73d6ea54-2a7b-469d-853c-914eda212d2f%2Fde2263e8-5dd7-49b6-b25d-206a4bc91566%2Fu632jxp_processed.png&w=3840&q=75)
Transcribed Image Text:### Net Present Value Analysis for Craig's Design and Landscaping Projects
---
**Objective**: Calculate the Net Present Value (NPV) for both of these projects.
#### Project Analysis Table
|
| Craig's Design and Landscaping | Net Present Value Analysis | Total Present Value |
|--------------------------------|-------------------------------------|----------------------|
| | **Show the formula and your work** | |
**Project A:**
| |
|----------------------------------------|
| |
| |
| |
| |
**Project B:**
| |
|----------------------------------------|
| |
| |
| |
| |
#### Maximum Acceptable Price Calculation
| |
|------------------------------------------------------------------------------|
| **What is the maximum acceptable price Craig should pay for each project?** |
---
### Instructions for Completing the Table
1. **Calculating NPV**:
- Use the formula for Net Present Value (NPV):
\[
NPV = \sum \left( \frac{C_t}{(1 + r)^t} \right) - C_0
\]
Where:
- \(C_t\) = Cash inflow at time \(t\)
- \(r\) = Discount rate
- \(t\) = Time period
- \(C_0\) = Initial investment
- Enter the calculations for each cash inflow and the discount rate used in the respective rows for Project A and Project B.
2. **Determining the Maximum Acceptable Price**:
- After calculating the total present value of future cash inflows, compare it with the initial investment to determine if the project is viable.
- The maximum acceptable price Craig should pay for each project is equivalent to the calculated NPV, ensuring that the NPV remains positive.
---
By following these steps, you will be able to determine the financial viability of the projects Craig is considering, ensuring his investment leads to the desired return.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education