The Sawyer Corporation has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%. The net present value of project Y is closest to:

Question

The Sawyer Corporation has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects:  Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%. The net present value of project Y is closest to:

Quizplus · Accepted Answer

To calculate the net present value (NPV) of each project, we need to find the present value (PV) of each cash inflow and outflow, discounted at a rate of 12%.

For project X:

PV of cash inflows = ($20,000 x 3.605) + ($30,000 x 3.106) + ($35,000 x 2.691) + ($40,000 x 2.345) + ($45,000 x 2.046) = $329,300

PV of cash outflows = $200,000

NPV of project X = $329,300 - $200,000 = $129,300

For project Y:

PV of cash inflows = ($50,000 x 3.605) + ($50,000 x 3.106) + ($50,000 x 2.691) + ($50,000 x 2.345) + ($50,000 x 2.046) = $548,150

PV of cash outflows = $500,000

NPV of project Y = $548,150 - $500,000 = $48,150

Therefore, the best choice is project Y with a NPV of $48,150.

The Sawyer Corporation Has $80,000 to Invest and Is Considering