Project A has the following cash flows. Year 1 Year 2 Year 3 Year 4 Year 5
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Question:
Project A has the following cash flows.
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | ||
Initial Investment | $75,000 | |||||
Cash Inflow | $ 20,000 | $ 25,000 | $ 30,000 | $ 36,000 | $ 50,000 | |
Required Rate of Return | 8% |
Calculate the following measures
- NPV of the project A
- The project payback period and Profitability Index (showing a decimal figure).
- Suppose you want to consider inflation rate in NPV. If the annual inflation rate
is 5%, what is the new NPV?
- Project B has the following cash flow:
PROJECT B | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Initial Investment | $50,000 | |||||
Cash Inflow | $ 20,000 | $ 20,000 | $ 20,000 | $ 20,000 | $ 20,000 | |
Required Rate of Return | 10% |
Compare the NPV between Project A and Project B. Which project is more profitable?
What is the difference in NPV between the two projects?
Expert Answer:
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