WEEK 5 PRACTICAL EXERCISE

PROJECT A
GIVENS (IN THOUSANDS)	YEAR 0	YEAR 1	YEAR 2	YEAR 3	YEAR 4	YEAR 5
Initial Investment	(4500)
Net Operating Cash Flow for PROJECT A		4500	3500	1500	700	500
Discount Rate/ Cost of Capital		20%	20%	20%	20%	20%
Present Value Interest Factor at 20%		0.8333
Annual Present Value (PV) of Cash Flows at 20%		3750
Present Value of Cash Flows (Total) at 20%
Net Present Value (NPV)of Cash at 20%
Discount Rate/ Cost of Capital		10%	10%	10%	10%	10%
Present Value Interest Factor at 10%		0.9091
Annual Present Value (PV) of Cash Flows at 10%		4091
Present Value of Cash Flows (Total) at 10%
Net Present Value (NPV)of Cash at 10%
PROJECT B
GIVENS (IN THOUSANDS)	YEAR 0	YEAR 1	YEAR 2	YEAR 3	YEAR 4	YEAR 5
Initial Investment	(4500)
Net Operating Cash Flow for PROJECT B		500	700	1500	3500	4500
Discount Rate/ Cost of Capital		20%	20%	20%	20%	20%
Present Value Interest Factor at 20%
Annual Present Value (PV) of Cash Flows at 20%
Present Value of Cash Flows (Total) at 20%
Net Present Value (NPV)of Cash at 20%
Discount Rate/ Cost of Capital		10%	10%	10%	10%	10%
Present Value Interest Factor at 10%
Annual Present Value (PV) of Cash Flows at 10%
Present Value of Cash Flows (Total) at 10%
Net Present Value (NPV) of Cash at 10%

Your goal is to determine the Net Present Value (NPV) for Projects A and B using a 20% and a 10% Discount Rate, then determine which project should be selected at each Discount Rate. GRAY BLOCKS WILL CONTAIN NO DATA.

Project A NPV at a 20% Discount Rate is ________.

Project B NPV at a 20% Discount Rate is _______.

The Project that should be selected at 20% is __________.

Project A NPV at a 10% Discount Rate is _______.

Project B NPV at a 10% Discount Rate is _______.

The Project that should be selected at 10% is __________.

General Information Regarding Solution of this Problem:

• The Present Value of Money to be received in the future is calculated by the formula:

PRESENT VALUE = FUTURE VALUE x PRESENT VALUE FACTOR

or

PV = FV x PVF

or

PV = FV x [1 / (1+i)ⁿ ]*

*i = Interest Rate

*n = Number of Investment Periods

• Net Present Value (NPV) is the present value of future cash flows related to an investment minus the cost of the initial investment.
• Discount Rate (also known as Cost of Capital or Hurdle Rate) is the return rate that is required to undertake a project.
• Net Operating Cash Flow is defined as the result of subtracting the cash outflows from the cash inflows. If you compare this problem to the example from page 314 of the text, you will note that we are skipping line A I since we have been given the Net Operating Cash Flow, we are not required to calculate it.

Steps in Completing this Exercise: Note you will have to follow each of these steps for both 20% and 10% for each of the project. Once you have made all your calculations, you will need to fill in the blanks at the bottom of the page and indicate which project should be selected at each percentage.

ITEM	EXPLANATION / CALCULATIONS
Present Value Interest Factor	You can find the Present Value Factors (PVF) on pages 297-298 (Table B.3) of your textbook. Locate the YEAR and the PERCENTAGE Where these two intersect, is the PVF. You must find the PVF for both 20% and 10% for each year and enter into the appropriate block.
Annual Present Value (PV) of Cash Flows	I have given you the formula for calculating the Present Value of Money to be received in the future: PV = FV x PVF. In the GIVENS, you were provided with the Future Value (FV) for each of the coming 5 years Net Cash Flows. Here is how the calculation for the 1st year of Project A would be completed with 20% Discount Rate/ Cost of Capital: PV = FV x PVF PV = 4500 x 0.8333 PV = 3750 (rounded) Here is how the calculation for the 1st year of Project A would be completed with 10% Discount Rate/ Cost of Capital: PV = FV x PVF PV = 4500 x 0.9091 PV = 4091 (rounded)
Present Value of Cash Flows (Total)	This is the TOTAL of the Annual Present Value of Cash Flows.
Net Present Value of Cash Flows	This is the Present Value of Cash Flow (Total) minus the initial investment.