Question

Net Present Value—Unequal Lives

Healey Development Company has two competing projects: an office building and a condominium complex. Both projects have an initial investment of $2,000,000. The net cash flows estimated for the two projects are as follows:

Net Cash Flow
Year	Office Building	Condominium Complex
1	$950,000	$1,200,000
2	600,000	900,000
3	500,000	700,000
4	450,000	400,000
5	350,000
6	350,000
7	350,000
8	300,000

The estimated residual value of the office building at the end of Year 4 is $900,000.

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

Determine which project should be favored, comparing the net present values of the two projects and assuming a minimum rate of return of 15%. Use the present value table above.

	Office Building		Condominium Complex
Present value of net cash flow total	$		$
Amount to be invested
Net present value	$		$

Answer 1

			Office Building		Condominium Complex
Year	Particular	Present value of $1 at compound Intrest @15% (A)	Net Cash flow (B)	Present value (A*B)	Net Cash flow ( C )	Present value ( A*C)
1	Yearly Cash inflow	0.87	$950,000	$826,500	$1,200,000	$1,044,000
2	Yearly Cash inflow	0.756	$600,000	$453,600	$900,000	$680,400
3	Yearly Cash inflow	0.658	$500,000	$329,000	$700,000	$460,600
4	Yearly Cash inflow	0.572	$450,000	$257,400	$400,000	$228,800
4	Residual value	0.572	$900,000	$514,800	0	0
			Total present value of cash inflow	$2,381,300	Total present value of cash inflow	$2,413,800
			Amount To be Invested	$2,000,000	Amount To be Invested	$2,000,000
			Net Present Value	$381,300	Net Present Value	$413,800

Since NPV of the condominium project is higher it should be favoured.