Project A requires an original investment of $54,700. The project will yield cash flows of $15,200 per year for 4 years. Project B has a computed net present value of $2,890 over a 4-year life. Project A could be sold at the end of 4 years for $18,900.Following is a table for the present value of $1 at compound interest:Year6%10%12%10.9430.9090.89320.8900.8260.79730.8400.7510.71240.7920.6830.63650.7470.6210.567Following is a table for the present value of an annuity of $1 at compound interest:Year6%10%12%10.9430.9090.89321.8331.7361.69032.6732.4872.40243.4653.1703.03754.2123.7913.605Use the tables above.a. Determine the net present value of Project A over a 4-year life with salvage value assuming a minimum rate of return of 12%. Round your answer to two decimal places.b. Which project provides the greatest net present value?

The objective of the question is to calculate the net present value (NPV) of Project A over a 4-year life with salvage value assuming a minimum rate of return of 12% and then compare it with the NPV of Project B to determine which project provides the greatest NPV.First, we need to calculate the present value of the annual cash flows from Project A. The cash flow is $15,200 per year for 4 years. From the table for the present value of an annuity of $1 at compound interest, we can see that the factor for 4 years at 12% is 3.037. So, the present value of the cash flows is $15,200 * 3.037 = $46,162.40.Next, we need to calculate the present value of the salvage value of Project A. The salvage value is $18,900 at the end of 4 years. From the table for the present value of $1 at compound interest, we can see that the factor for 4 years at 12% is 0.636. So, the present value of the salvage value is $18,900 * 0.636 = $12,020.40.Now, we can calculate the total present value of Project A by adding the present value of the cash flows and the present value of the salvage value. So, the total present value is $46,162.40 + $12,020.40 = $58,182.80.The net present value (NPV) of Project A is calculated by subtracting the original investment from the total present value. So, the NPV of Project A is $58,182.80 - $54,700 = $3,482.80. Rounded to two decimal places, the NPV is $3,482.80.Finally, we compare the NPV of Project A with the NPV of Project B. The NPV of Project B is given as $2,890. Since $3,482.80 (Project A's NPV) is greater than $2,890 (Project B's NPV), Project A provides the greatest net present value.The net present value of Project A over a 4-year life with salvage value assuming a minimum rate of return of 12% is $3,482.80. When compared with the net present value of Project B, which is $2,890, Project A provides the greatest net present value.

Answered: Project A requires an original…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Project A requires an original investment of $54,700. The project will yield cash flows of $15,200 per year for 4 years. Project B has a computed net present value of $2,890 over a 4-year life. Project A could be sold at the end of 4 years for $18,900.

Following is a table for the present value of $1 at compound interest:

Year	6%	10%	12%
1	0.943	0.909	0.893
2	0.890	0.826	0.797
3	0.840	0.751	0.712
4	0.792	0.683	0.636
5	0.747	0.621	0.567

Following is a table for the present value of an annuity of $1 at compound interest:

Year	6%	10%	12%
1	0.943	0.909	0.893
2	1.833	1.736	1.690
3	2.673	2.487	2.402
4	3.465	3.170	3.037
5	4.212	3.791	3.605

Use the tables above.

a. Determine the net present value of Project A over a 4-year life with salvage value assuming a minimum rate of return of 12%. Round your answer to two decimal places.

b. Which project provides the greatest net present value?

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