VU Fin 622 GDB Solution fall2010

Solution:

I.                    On the basis of NPV approach, which project(s) you would select if the projects are independent and why?

Ans :

First Project C will be selected and then project A will be selected as both have positive NPV.

II.                 On the basis of NPV approach, which project(s) you would select if the projects are mutually exclusive and why?

Ans :

In case of mutually exclusive, only Project C will be selected because it has positive and higher NPV value i-e 21485

Calculations:

 NPV net present value

I , initial investment = 45000

R , rate = 14% = 14/100= 0.14

t , time in years

CF = cash inflows

Project A :

I , initial investment = 45000

NPV = - I0 + CF1 / (1+r)t + CF2 / (1+r)t + CF3 / (1+r)t

         = -45000 + 20000/ (1+ 0.14) 1 + 20000 / (1+0.14) 2 + 20000/ (1+0.14)3

        = 1432.64 ( positive NPV)

Project B :

I , initial investment = 70000

NPV = - I0 + CF1 / (1+r)t + CF2 / (1+r)t + CF3 / (1+r)t

         = -70000 + 70000/ (1+ 0.14) 1 + 70000 / (1+0.14) 2 + 70000/ (1+0.14)3

        = -12200 ( negative NPV)

Project C:

I , initial investment = 50000

NPV = - I0 + CF1 / (1+r)t + CF2 / (1+r)t + CF3 / (1+r)t

         = -50000 + 50000/ (1+ 0.14) 1 + 50000 / (1+0.14) 2 + 50000/ (1+0.14)3

        = 21485 ( positive NPV