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

By: Rashid Javed | Updated on: September 8th, 2022

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:


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).


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

NPV of project A:


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

NPV of project B:


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


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

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