Question

286 PART 4: CAPITAL EXPENDITURE ANALYSIS istics: 13-3 Two mutually exclusive projects have the following characteristic 2 9000 Year 3 $20,000 Year 4 $5,000 Project Year 0 Year 1 Year 2 Year 3 -$30,000 $15,000 $10,000 $20,000 - 20,000 18,000 10,000 The cost of capital is 10 perce of capital is 10 percent. Choose the more desirable projecte the basis of the annualized net present value.
everything the same but project G’s year 2 cash flow is $20,000 and H’s year 2 cash flow is $20,000. The cost of capital is 12%

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Answer 1

As required, please find the solution below, except for cash flow of year 2 (which has been taken as $ 20,000 instead of $10,000) and cost of capital (which has been taken as 12% instead of 10%), everything has been kept the same. Kindly let me know if there is any concern.

As per the below solution, Project H is better, as it has an higher annualized present value as compared to Project G.

Calculation of annualiszed present value 1 2 3 Particulars Project G Project H Present value of cash inflows (Note-1) 46,750 -30,000 32,015.31 4 5 Present value of cash outflows -20,000 12,015 16,750 6 NPV PVAF 7 3.04 1.69 5,515 7,109 9 10 Note:1 Calculation of Present value of cash inflows Note :2 Calculation of Present value factors (PVF and Present value annuity factors (PVAF) @ 12% 11 12 Project G 13 Year Year PVF PVAF PVF (refer note 2) PV 0.89 Amount 1 0.89 0.89 13,392.86 0.80 15,943.88 0.71 14,235.60 15,000 14 1 2. 0.80 1.69 3 20,000 15 2 0.71 2.40 16 3 20,000 0.64 3.04 17 4 3,177.59 5,000 0.64 18 Total PVCI 46,750 19 20 Project H 21 22 Year PVF (refer note 2) PV Amount 0.89 16,071.43 0.80 15,943.88 23 1 18,000 24 2 20,000 25 Total PVCI 32,015.31 26 27

with show formulas

A E G Н Calculation of annualiszed present value 3 Particulars Project G -D18 Project H 4 Present value of cash inflows (Note-1) D25 Present value of cash outflows -30000 -20000 =SUM(B4:B5) -SUM(C4:C5) 6 NPV PVAF H16 H14 -B6/B7 |ЕС6/C7 g 10 Note:1 Calculation of Present value of cash inflows Note :2 Calculation 1 2 Project G Year PVF PVAF = 1/(1+0.12)AF13 =1/(1+0.12)^F14 - 1/(1+0.12)AF15 =1/ ( 1+0.12)AF16 PVF (refer note 2) 3 Year Amount PV 1 G13 -G14+H13 -G15+H14 4 1 15000 =B14*C14 G13 2. 5 2 -B15*C15 20000 G14 6 3 20000 -B16*C16 G15 4 -G16+H15 7 4 5000 B17*C17 G16 -SUM(D14:D17) 8 Total PVCI 9 20 Project H 2 Year PVF (refer note 2) G13 Amount PV 3 1 18000 -B23*C23 B24* C24 -SUM(D23:D24) 4 2 20000 G14 5 Total PVVCI 26 27