Question

The PZ firm is evaluating the following two mutually exclusive projects.  One asset has a 3 year life, whereas the other has a 6 year life. The firm has a required rate of return of 15%. Based on your capital budgeting analysis the firm should _____(accept or reject)________ Asset A and ____(accept or reject)_______ Asset B.

Year	Asset A	Asset B
0	($60,000)	($51,500)
1	40,000	13,000
2	20,000	19,000
3	17,000	11,000
4		20,000
5		10,000
6		8,000

Answer 1

Discount rate	15.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(60,000.00)	0	(60,000.00)	(60,000.00)
40,000.000	1	34,782.61	(25,217.39)
20,000.000	2	15,122.87	(10,094.52)
17,000.000	3	11,177.78	1,083.26

NPV of A = 1083.26

PV = 1083.26, FV = 0, rate = 15%, N = 3

use PMT function in Excel

EAA of A = 474.44

Discount rate	15.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(51,500.00)	0	(51,500.00)	(51,500.00)
13,000.000	1	11,304.35	(40,195.65)
19,000.000	2	14,366.73	(25,828.92)
11,000.000	3	7,232.68	(18,596.24)
20,000.000	4	11,435.06	(7,161.18)
10,000.000	5	4,971.77	(2,189.41)
8,000.000	6	3,458.62	1,269.21

NPV of B = 1269.21

PV = 1269.21, FV = 0, N = 6, rate = 15%

use PMT funciton in Excel

EAA of B = 335.37

accept A and reject B