[ajtrack84]

Project A requires an original investment of $65,000. The project will yield cash flows of $15,000 per year for seven years. Project B has a calculated net present value of $5,500 over a five year life. Project a could be sold at the end of five years for a price of $30,000. (a) Using the proper table below determine the net present value of Project A over a five-year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greates net present value?

Below is a table for the present value of $1 at compound interest.

Year 6% 10% 12%
1 .943 .909 .893
2 .890 .826 .797
3 .840 .751 .712
4 .792 .683 .636
5 .747 .621 .567

Below is a table for the present value of an annuity of $1 at compound interest.

Year 6% 10% 12%
1 .943 .909 .893
2 1.833 1.736 1.690
3 2.673 2.487 2.402
4 3.465 3.170 3.037
5 4.212 3.791 3.605

[morgaine300]

Divide your cash flows into 2 categories. One, those that are lump sums. i.e. where you will get one lump sum amount coming in at some future date. Those are just present values of $1. Two, those that are a series of payments. A series of equal payments at equal times is an annuity. So all series of payments will be figured as an annuity.

What rate of return do you want?

Figure the present value of A using the above. Then compare with the original investment. A net present value is the difference between the present value of what you are getting out of the investment, and how much you actually invested.

They've already given you the present value of B. And you compare the two to see which one is higher.