Project A requires an original investment of $57,700. The project will yield cash flows of $16,600 per year for 4 years. Project B has a computed net present value of $3,270 over a 4-year life. Project A could be sold at the end of 4 years for a price of $16,300.Following is a table for the present value of $1 at compound interest:Year 6% 10% 12%1 0.943 0.909 0.8932 0.890 0.826 0.7973 0.840 0.751 0.7124 0.792 0.683 0.6365 0.747 0.621 0.567 Following is a table for the present value of an annuity of $1 at compound interest:Year 6% 10% 12%1 0.943 0.909 0.8932 1.833 1.736 1.6903 2.673 2.487 2.4024 3.465 3.170 3.0375 4.212 3.791 3.605 Use the tables above.a. Determine the net present value of Project A over a 4-year life with salvage value assuming a minimum rate of return of 12%. Round your answer to two decimal places.$_______________b. Which project provides the greatest net present value?A. Project AB. Project B

Calculation of Net Present Value of Project A Net Present value = Present Value of cash inflows - Initial investment in the project = $ 60,781 - $ 57,700 = $ 3,081 Therefore, net present value of Project A is $ 3,081. Calculation of Present value of cash inflows Present value of cash inflows = (Annual cash inflow x present value of annuity of $ 1 at 12% for 4 years) + (Salvage value x Present value of $ 1 at 12% for 4 years) = ($ 16,600 x 3.037) + ($ 16,300 x 0.636) = $ 60,781Since Net present value of Project A (i.e., $ 3,081) is lower than that of Project B (I.e., $ 3,270), Project B has the greatest Net present value.

Answered: Project A requires an original…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Project A requires an original investment of $57,700. The project will yield cash flows of $16,600 per year for 4 years. Project B has a computed net present value of $3,270 over a 4-year life. Project A could be sold at the end of 4 years for a price of $16,300.

Following is a table for the present value of $1 at compound interest:

Year	6%	10%	12%
1	0.943	0.909	0.893
2	0.890	0.826	0.797
3	0.840	0.751	0.712
4	0.792	0.683	0.636
5	0.747	0.621	0.567

Following is a table for the present value of an annuity of $1 at compound interest:

Year	6%	10%	12%
1	0.943	0.909	0.893
2	1.833	1.736	1.690
3	2.673	2.487	2.402
4	3.465	3.170	3.037
5	4.212	3.791	3.605

Use the tables above.

a. Determine the net present value of Project A over a 4-year life with salvage value assuming a minimum rate of return of 12%. Round your answer to two decimal places.
$_______________

b. Which project provides the greatest net present value?

A. Project A

B. Project B

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