Respuesta :
Answer:
Project B's net present value is $54,326.82.
Explanation:
The net present value of Project B can be calculated as follows:
Step 1: Calculation of the Project B's present value of annual cash operating inflows
This can be calculated using the formula for calculating the present value of an ordinary annuity as follows:
PVC_B = P * ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)
Where;
PVC_B = Present value of Project B's present value of annual cash operating inflows = ?
P = Project B's annual cash operating inflows = $35,000
r = required rate of return = 14%, or 0.14
n = number of years = 6
Substitute the values into equation (1), we have:
PVC_B = $35,000 * ((1 - (1 / (1 + 0.14))^6) / 0.14)
PVC_B = $136,103.36
Step 2: Calculation of the Project's B working capital investment released for use elsewhere
This can be calculated using the formula for calculating the present value as follows:
PVW_B = W_B / (1 + r)^n .......................... (2)
PVW_B = Present value of Project B's working capital investment released for use elsewhere = ?
W_B = Project's B working capital investment released for use elsewhere = $40,000
r = required rate of return = 14%, or 0.14
n = number of years = 6
Substitute the values into equation (2), we have:
PVW_B = $40,000 / (1 + 0.14)^6
PVW_B = $18,223.46
Step 3: Calculation of the Project B's net present value
Project B's net present value = PVC_B - Cost of Project's B equipment - Project B's Working capital investment + PVW_B
Project B's net present value = $136,103.36 - $60,000 - $40,000 + $18,223.46
Project B's net present value = $54,326.82
