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FIN3701 ASSIGNMENT 1 [COMPLETE ANSWERS] SEMESTER2 2024[355803]
FIN3701 ASSIGNMENT 1 [COMPLETE ANSWERS] SEMESTER2 2024[355803]
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:FIN3701 ASSIGNMENT 1 [COMPLETEANSWERS] SEMESTER2
2024[355803]
Question 1: Capital Budgeting Decision
Question: A company is considering two investment projects, Project A and Project B. Project
A requires an initial investment of $200,000 and is expected to generate cash flows of $60,000
per year for 5 years. Project B requires an initial investment of $250,000 and is expected to
generate cash flows of $75,000 per year for 5 years. The company's cost of capital is 10%.
Which project should the company choose based on the Net Present Value (NPV) method?
Answer: To determine which project the company should choose, we calculate the NPV for
both projects using the formula:
NPV=∑Ct(1+r)t−C0\text{NPV} = \sum \frac{C_t}{(1 + r)^t} - C_0NPV=∑(1+r)tCt
−C0
Where:
● CtC_tCt = Cash flow in year ttt
● rrr = Cost of capital (10% or 0.10)
● C0C_0C0 = Initial investment
Project A:
NPV=∑t=1560,000(1+0.10)t−200,000\text{NPV} = \sum_{t=1}^{5} \
frac{60,000}{(1 + 0.10)^t} - 200,000NPV=t=1∑5(1+0.10)t60,000−200,000
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