Exercise-16 (Net present value analysis of two alternatives)

The Sunshine company is considering two projects, project A and project B. Project A requires the purchase of an equipment but no working capital investment whereas project B requires a working capital investment but no equipment. The relevant information for net present value analysis is given below:

exercise-16-cbt-img1

The working capital required for project B will be released at the end of project life. Sunshine company uses an 18% discount rate.

Required: Are the two projects comparable using net present value (NPV)? If yes, Select the best investment using net present value (NPV) method. (Ignore income tax).

Solution:

Yes, the two projects are comparable because both the projects require equal amount of initial investment.

NPV of project A:

exercise-16-cbt-img2

*Value from “present value of an annuity of $1 in arrears table“.
**Value from “present value of $1 table”.

NPV of project B:

exercise-16-cbt-img3

*Value from “present value of an annuity of $1 in arrears table“.
**Value from “present value of $1 table“.

Conclusion:

According to NPV method, project A looks more desirable because its net present value is more than project B.

By Rashid Javed (M.Com, ACMA)
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8 Comments on Exercise-16 (Net present value analysis of two alternatives)

  1. Eugenator

    Thanx guys keep up the good work.You have always been a way out

    Reply
  2. Densetsu No

    Hi there,
    I tried to replicate the NPV and found a result of 63.052 for the first one and 48.931 for the second one.
    I’m pretty worried that I have calculated the NPV in the wrong way for a long time.
    Could you please tell me which formula did you use?

    Thanks a lot,
    Densetsu

    Reply
  3. Accounting For Management

    It may be a rounding difference. Did you use a software or calculator to find NPV of two projects?

    Reply
    1. annie

      how if it said that you can borrow fund from the bank at 3% and there are estimated cash inflow and cash outflows.

      Reply
  4. An Hong Nhung

    I also had the same result as Densetsu.

    I used excel to calculate, just normal simple formulas.

    Reply
  5. ASIM

    Sir,

    I have list some question related to exercise 16 requested too kindly ans me.

    1) Depreciation is not calculated as we can caculate through straight line method ? Why? when we need to calculate depreciation?
    2) Working capital will always release in every question or it also depend on question to tell us to release?
    3)Solvage value in project B is not calculated why?

    Reply
  7. abonyo brian

    thanks so much wished to have many questions through my email.God bless u for a good work for our assistance as students

    Reply

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