Using the table in Exercise 10, calculate the net present value for each project shown below at the end of six years and determine which would be the better decision for Mike’s Camping Supply. Assume that Project 1 can be sold for $15,000 at the end of the sixth year. Project 1 Project Cost $160,000 Cost $150,000 Minimum desired rate of return 12% Minimum desired rate of return 12% Expected useful life 7 years Expected useful life 6 years Yearly cash flows to be received: Yearly cash flows to be received: Year 1 $ 40,000 Year 1 $ 40,000 Year 2 44,000 Year 2 42,000 Year 3 41,000 Year 3 46,000 Year 4 42,000 Year 4 41,000 Year 5 45,000 Year 5 45,000 Year 6 63,000 Year 6 47,500 Present Value of $1 at Compound Interest Year 10% 12% 15% 1 0.909 0.893 0.870 2 0.826 0.797 0.756 3 0.751 0.721 0.658 4 0.683 0.636 0.572 5 0.621 0.567 0.497 6 0.564 0.507 0.432 7 0.513 0.452 0.376 8 0.467 0.404 0.327 9 0.424 0.361 0.284 10 0.386 0.322 0.247
Using the table in Exercise 10, calculate the
Project 1 Project
Cost $160,000 Cost $150,000
Minimum desired
Yearly
Year 1 $ 40,000 Year 1 $ 40,000
Year 2 44,000 Year 2 42,000
Year 3 41,000 Year 3 46,000
Year 4 42,000 Year 4 41,000
Year 5 45,000 Year 5 45,000
Year 6 63,000 Year 6 47,500
Present Value of $1 at Compound Interest
Year 10% 12% 15%
1 0.909 0.893 0.870
2 0.826 0.797 0.756
3 0.751 0.721 0.658
4 0.683 0.636 0.572
5 0.621 0.567 0.497
6 0.564 0.507 0.432
7 0.513 0.452 0.376
8 0.467 0.404 0.327
9 0.424 0.361 0.284
10 0.386 0.322 0.247
The disparity between the present value of cash inflows and outflows across a span of time is known as net present value (NPV). To evaluate the viability of a proposed investment or project, NPV is employed in capital budgeting and investment management. The outcome of computations to determine the present value of a flow of payments in the future is NPV.
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