Question

Net Present Value Analysis Anderson Company must evaluate two capital expenditure proposals. Anderson’s hurdle rate is 12%. Data for the two proposals follow. Proposal X Proposal Y Required investment $120,000 $120,000 Annual after-tax cash inflows 24,000 After-tax cash inflows at the end of years 3, 6, 9, and 12 72,000 Life of project 12 years 12 years Using net present value analysis, which proposal is the more attractive? Do not use negative signs with your answers. Round PV answers to the nearest whole number. Use rounded answers for subsequent calculation of net present value. Proposal X Proposal Y Net present value Initial outflows Answer Answer PV of future cash flows Answer Answer Net present value Answer Answer Which proposal is more attractive?

Answer 1

Answer:

Initial outflows for project X and Y is $120,000

PV for project X = $148,664.98

NPV For project X = $28,664.98

NPV for project Y = $12,170.15

PV for project Y = $132,170.15

Project X is more attractive

Explanation:

Net present value is the present value of after tax cash flows from an investment less the amount invested .

NPV can be calculated using a financial calculator:

NPV for proposal X :

Cash flow in year 0 = $-120,000

Cash flow each year from year one to 12 = $24,000

I = 12%

NPV = $28,664.98

PV = $-120,000 + 28,664.98 = $148,664.98

NPV for proposal Y :

Cash flow in year 0 = $-120,000

Cash flow in year 3, 6, 9, and 12 = $72,000

I = 12%

NPV = $12,170.15

PV = $120,000 + $12,170.15 = $132,170.15

The project X should be chosen because its NPV is greater than that of project Y.