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 discount the cash flows at Sawyer's discount rate of 12%.

For Project X: 
NPV = -$50,000 + [(20,000/1.12) + (25,000/1.12^2) + (30,000/1.12^3) + (15,000/1.12^4) + (10,000/1.12^5)] 
NPV = -$50,000 + $16,078.89 + $18,197.09 + $19,972.03 + $9,468.11 + $6,306.23 
NPV = -$50,000 + $69,022.35 
NPV = $19,022.35

For Project Y: 
NPV = -$80,000 + [(25,000/1.12) + (20,000/1.12^2) + (15,000/1.12^3) + (30,000/1.12^4) + (40,390/1.12^5)] 
NPV = -$80,000 + $22,321.43 + $15,468.87 + $10,577.35 + $18,875.02 + $30,250.03 
NPV = -$80,000 + $97,492.70 
NPV = $17,492.70

Therefore, the best choice is Project Y with an NPV of $17,492.70.

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