Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:
Year Project A Project B
0 -$100,000 -$100,000
1 32,000
2 32,000
3 32,000
4 32,000
5 32,000 $200,000

a. What is each project’s payback period?
b. What is each project’s net present value?
c. What is each project’s internal rate of return?
d. What has caused the ranking conflict?
e. Which project should be accepted? Why?


I need help with B. What is each project’s net present value?

Here is what I am getting, however, my team mates seem to disagree with me. Can you please help?

NPV of Project A = $32,000 * PVAF5, 0.11 - $100,000
($32,000 * 3.696) – ($100,000)
$118,272 - $100,000
Project A NPV: $18,272
NPV OF Project B = $200,000 * PVAF5, 0.11 - $100,000
($200,000 * 3.696) – ($100,000)
$739,200 - $100,000
Project B NPV: $639,200

You are right for A, but for B it seems that you have assumed that the cash flow of $200,000 will occur every year and that is incorrect. The correct treatment is to find out the present value of $200,000 received at the end of 5 years which at 11% for 5 years is 0.59345 which when multiplied with 200,000 gives you 118,690. Hence the NPV is 18,690, which is bit better than A.