Problem 10-9 Biased forecasts

Cash flows for projects F and G are given below.

Cash Flows, ($) Project C0 C1 C2 C3 C4 C5 F 9,700 + 6,700 + 5,700 + 4,700 0 0 G 9,700 + 1,940 + 1,940 + 1,940 + 1,940 + 1,940

The cost of capital for projects of this type is 12%. Assume that the forecasted cash flows are overstated and should be 6% lower than those provided by the project analyst. But a lazy financial manager, unwilling to take the time to argue with the projects sponsors, instructs them to use a discount rate of 18%. Assume the year 5 cash flow is a perpetuity.

a.

What are the projects true NPVs? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

NPV Project F $ Project G $

b.

What are the NPVs at the 18% discount rate? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

NPV Project F $ Project G $