Question

Juan is considering two independent projects. Project A costs $50,000 and cash flows of $18,700, $46,300, and $12,200 for Years 1 to 3, respectively. Project B costs $70,000 and has cash flows of $10,600, $15,800, and $67,900 for Years 1 to 3, respectively. Project C costs $25,000 and has cash flows of $15,300, $3,000, and $20,000 for Years 1 to 3, respectively. Juan assigns a discount rate of 10 percent to these projects. The total budget is $120,000. Which combinations of rojects is the best?

A. A+B

B. A+C

C. B+C

D. A+B+C

Answer 1

fc =SUM(D3:06) Year 1 Project A 2 Year Cash flows PV@10% 0 $ -50,000.00 1 $ 18,700.00 2 $ 46,300.00 3 $ 12,200.00 NPV Rank 1 Present Value 1.0000 $ -50,000.00 0.9091 $ 17,000.00 0.8264 $ 38,264.46 0.7513 $ 9,166.04 $ 14,430.50 Project B Cash flows Pv@10% Present Value 0 $-70,000.00 1.0000 $ -70,000.00 1 $ 10,600.00 0.9091 $ 9,636.36 2 $ 15,800.00 0.8264 $ 13,057.85 3 $ 67,900.00 0.7513 $ 51,014.27 NPV $ 3,708.49 Rank 3 L M N Project B Year Cash flows Pv@10% Present Value 0 $-25,000.00 1.0000 $ -25,000.00 1 $ 15,300.00 0.9091 $ 13,909.09 2 $ 3,000.00 0.8264 $ 2,479.34 3 $ 20,000.00 0.7513 $ 15,026.30 NPV $ 6,414.73 Rank 2 Total Available Investment 120000 Project A -50000 Balance 70000 Project C -25000 Balance 45000 Assuming Project B is indivisible we cannot invest balance in B Answer B A+C

fx =SUM(D3:06) - D E G H L MN А 1 Project A F Project B Year K Project B Year 30 4 1 Cash flows Pv@10% -50000 18700 =C3/1.1 46300 =C4/1.1 12200 C5/1.1 NPV Rank 1 Present Value =C3*B3 =C4*B4 =C5*B5 =C6*B6 =SUM(D3:06) Cash flows Pv@10% Present Value - 70000 =H3*G3 10600 =H3/1.1 =H4*G4 15800 =H4/1.1 =H5*G5 67900 =H5/1.1 =H6*66 NPV =SUM(13:16) Rank 3 Cash flows Pv@10% Present Value -25000 =M3*L3 15300 =M3/1.1 =M4*L4 3000 =M4/1.1 =M5*L5 20000 =M5/1.1 =M6*L6 NPV =SUM(N3:N6) Rank 2 Total Available Investme: 120000 Project A -50000 Balance =SUM(D10:011) Project C -25000 Balance =SUM(D12:D13) Assuming Project B is ind Answer B A+C