Question

Determine which of two investment projects a manager should choose if the discount rate for the firm is 6 percent. The first project promises a profit of $500,000 in each of the next five years, which the second project promises a profit of $160,000 in each of the next 20 years.

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Answer 1

Project one gives $5,00,000 in each of five years

we can discount $500000 at 6% for five years

= 500000* PVAF(0.06,5)

=500000*4.212 ( from present value annuity factor table )

=$ 21,06,000.

Project two gives $1,60,000 in each of 20 years

we can discount $160000 at 6% for twenty years

= 160000* PVAF(0.06,20)

=160000*11.470 ( from present value annuity factor table )

=$ 18,35,200

project 1 is acceptable because present cash inflows are more from project 1 than that of project 2.