Calculate the net present value for each project

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Reference no: EM132687642

Question - Street Walk Ltd. has the option of investing in the following two projects of equal risk; they are mutually exclusive alternatives for expanding the firm's capacity. The firm's cost of capital is 14%. The cash flows for each project are given in the following table.

PROJECT A PROJECT B

Initial investment 600,000 300,000

Year Net cash inflows Net cash inflows

1 150,000 145,000

2 200,000 90,000

3 240,000 85,000

4 280,000 120,000

Street Walk Ltd. has incurred a research and development expenditure of $30,000 initially for project A and $20,000 for project B, both of which are considered sunk costs for the business. Due to seasonal demand, business believes for project A only, they will have to incur additional electricity charge of $1,000 each year till year 4. At the end of year 4, the business believes that they could sell project A for $50,000 and project B for $40,000. The finance manager has also suggested that any investment that takes more than 3 years to pay back the initial investment should be rejected.

Required - Calculate the net present value for each project. Using the net present value criterion, which project is preferable and why?

Reference no: EM132687642

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