The CFO of Advo Corporation is considering two investmentopportunties. The expected future cash inflows for each opportunityfollow:
, Year 1 Year 2 Year 3 Year 4
Project 1 $144,000 $147,000 $160,000 $178,000
Project 2 204,000 199,000 114,000 112,000
Both investments require an initital of $400,000. dvo's desiredrate of return is 16 percent.
a) Compute the net present value of each project. Which projectshould Advo adopt based on the net present value approach?
b) Use the incremental revenue summation method to compute thepayback period for each project. Which project should Advo adoptbased pn the payback approach?
1) What is meant by the expression, time value of money?
2) Why should all capital investment proposals include timevalue of money (present value) calculations of future cash flowsthat are to be received from the alternative investments?
