New Hampshire Company is considering two investments.The relevant data follows:
$\begin{array}{lll}&\text { Project A }&\text { Project B }\
\text { Cost } & \$ 200,000 & \$ 300,000 \
\text { Annual cash savings(end of year) } & \$ 50,692 & \$ 60,995 \
\text { Terminal salvage value } & \$ 50,000 & \$ 70,000 \
\text { Estimated useful life in years } & 5 & 5 \
\text { Minimum desired rate of return } & 10 \% & 10 \%\
\text { Method of depreciation }&\text { Straight-line }&\text { Straight-line }\
\end{array}$
$\begin{array}{lll}&\text { Present Value } & \text { Present Value } \
&\text { Of } \$ 1 & \text { of Ordinary } \
&\text { for } 5 \text { periods } & \text { Annuity of } \$1 \
&& \text { for } 5 \text { periods }\
5 \% & 0.7835 & 4.3295 \
6 \% & 0.7473 & 4.2124 \
7 \% & 0.713 & 4.1002 \
8 \% & 0.6806 & 3.9927 \
10 \% & 0.6209 & 3.7908 \
12 \% & 0.5674 & 3.6048 \
14 \% & 0.5194 & 3.4331
\end{array}$
Ignore taxes.Using the net present value method,which project should be accepted?

Question

Quizplus · Accepted Answer

The net present value (NPV) for Project A is calculated as follows:  NPV = (Annual cash savings * Present value of annuity) + (Salvage value * Present value of $1) - Initial cost  NPV for Project A = ($50,692 * 3.7908) + ($50,000 * 0.6209) - $200,000 = $191,999.93 - $200,000 = -$8,000.07  NPV for Project B = ($60,995 * 3.7908) + ($70,000 * 0.6209) - $300,000 = $231,000.14 - $300,000 = -$68,999.86  Since both NPVs are negative, neither project should be accepted.

New Hampshire Company Is Considering Two Investments Ignore Taxes