ANSWER :
Project A :
Computation of net operating cash flow :
|
|
|
Year-0 |
Year-1 |
Year-2 |
Year-3 |
Year-4 |
Year-5 |
Year-6 |
|
| A |
Initial cash outflow |
|
-75,000 |
|
|
18,000 |
18,000 |
18,000 |
18,000 |
|
| B |
Operating cash flow |
|
|
18,000 |
18,000 |
|
|
|
|
|
| C |
salvage value |
|
|
|
|
|
|
|
22000 |
|
| D |
Net cash flow (A+B+C) |
|
(75,000) |
18,000 |
18,000 |
18,000 |
18,000 |
18,000 |
40,000 |
|
| E |
PVIF 12% |
|
1 |
0.8929 |
0.7972 |
0.7118 |
0.6355 |
0.5674 |
0.5066 |
|
| F |
Present value (E*D) |
|
-75,000 |
16,071 |
14,349 |
12,812 |
11,439 |
10,214 |
20,265 |
10,151 |
|
|
|
|
|
|
|
|
|
|
|
|
NPV = |
$10,151.22 |
|
|
|
|
|
|
|
|
Project B :
Computation of net operating cash flow
|
|
|
Year-0 |
Year-1 |
Year-2 |
Year-3 |
Year-4 |
Year-5 |
Year-6 |
|
| A |
Working capital |
|
-75,000 |
|
|
|
|
|
|
|
| B |
Operating cash flow |
|
|
11,000 |
11,000 |
11,000 |
11,000 |
11,000 |
11,000 |
|
| C |
working capital release |
|
|
|
|
|
|
|
75000 |
|
| D |
Net cash flow (A+B+C |
|
(75,000) |
11,000 |
11,000 |
11,000 |
11,000 |
11,000 |
86,000 |
|
| E |
PVIF @ 12% |
|
1 |
0.8929 |
0.7972 |
0.7118 |
0.6355 |
0.5674 |
0.5066 |
|
| F |
Present value (E*D) |
|
-75,000 |
9,821 |
8,769 |
7,830 |
6,991 |
6,242 |
43,570 |
8,223 |
|
NPV = |
$8,222.81 |
|
|
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Since NPV of B is lower compared to
NPV of A . Therefore A should be selected.
