Question

Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Project H ($27,000 Investment) Project E ($32,000 Investment) Cash Flow Cash Flow Year Year $10,000 13,000 14,000 16,000 $15,000 13,000 11,000 1 1 2 2 3 3 4 a. Determine the net present value of the projects based on a zero percent discount rate. Net Present Value Project E Project H

Answer 1

a.

Discount Rate	0%
	Cash Flow
Year	Project E	Project H
1	10000	15000
2	13000	13000
3	14000	11000
4	16000
Total	53000	39000
Initial Investment	-32000	-27000
Net Present Value	21000	12000

b.

Discount Rate	9%
	Cash Flow		Discount Factor@9%	Present Value of Cash Flow
Year	Project E	Project H		Project E	Project H
1	10000	15000	0.917	9170	13755
2	13000	13000	0.842	10946	10946
3	14000	11000	0.772	10808	8492
4	16000		0.708	11328	0
	53000	39000		42252	33193

	Project E	Project H
Present Value of Cash inflow	42252	33193
Initial Investment	-32000	-27000
Net Present Value	10252	6193

c. Both H and E

Reason:

Since there is positive NPV in both cases. So both projects are favorable because they are not mutually exclusive.