Giant Equipment Ltd. is considering two projects to invest next year. Both projects have the same
start-up costs. Project A will produce annual cash flows of $42,000 at the beginning of each year for
eight years. Project B will produce cash flows of $48,000 at the end of each year for seven years. The
company requires a 12% return
Answers
Answered by
0
Given:
Cash flow of project A = $42,000
Cash flow of project B = $42,000
Rate of Return = 12%
To find:
Which project is feasible
Project A
Annual Cash Flows = 42000
Interest Rate = 0.12
Years = 8
Annuity Due = C × ( 1 - ( 1 - r)`n/r × ( 1+r)
= 42,000 × ( 1 - ( 1 - 0.12)`8/ 0.12 × ( 1 + 0.12)
= 208,640. 8 × 1.12
Present value = 2,33,677
Project B
Annual Cash Flows = 48000
Interest Rate = 0.12
Years = 7
Annuity Due = C × ( 1 - ( 1 - r)`n/r
= 48,000 × ( 1 - ( 1 - 0.12)`7/ 0.12
Present value = 2,19,060
Answer: The company must select Project A, as there are more cash flows in Project B.
Similar questions