JP Company is considering two capital investment proposals. Estimates regarding each project are provided below: $\begin{array}{lr}
&\text { Project Echo}&\text { Project Charlie }\
\text { Initial investment } & \$ 400,000&\$600,000 \
\text { Annual net income } & 20,000 &42,000\
\text { Net annual cash inflow } & 100,000&142,000 \
\text { Estimated useful life } & 5 \text { years } &6 \text { years } \
\text { Salvage value } & 0&0
\end{array}$ The company requires an 11% rate of return on all new investments. $\begin{array}{lllll}
\text { Periods } & 9 \%&10 \% &11 \% &12 \%\
\hline5 & 3.890 & 3.791 & 3.696 & 3.605 \
6 & 4.486 & 4.355 & 4.231 & 4.111
\end{array}$
- The net present value for Project Charlie is
A) $600802.
B) $802.
C) $100000.
D) $178900.

Question

Quizplus · Accepted Answer

The net present value (NPV) for Project Charlie is calculated by subtracting the initial investment from the present value of the net annual cash inflows. The present value of the net annual cash inflows is found by multiplying the net annual cash inflow by the present value factor for the project's life at the required rate of return. For Project Charlie, this is $142,000 * 4.231 (from the table for 6 periods at 11%) = $601,002. Subtracting the initial investment of $600,000 gives an NPV of $802.

JP Company Is Considering Two Capital Investment Proposals The Company Requires an 11% Rate of Return on All