Independent solution

How to solve this Interest Rate Valuation question

Setup

Setup

Each project requires a separate signed cash-flow present value because the company may undertake at most two, not necessarily exactly two.

NPVA=−800+5001.1+5001.12−1751.13+1001.14=4.59NPV_A=-800+\frac{500}{1.1}+\frac{500}{1.1^2}-\frac{175}{1.1^3}+\frac{100}{1.1^4}=4.59

Model

Model

A project should be accepted only when its discounted receipts less its initial investment are positive.

NPVB=−2.36NPV_B=-2.36

Compute

Compute

The three net present values are 4.59, negative 2.36, and negative 9.54; combining a negative project with A would reduce value.

NPVC=−9.54NPV_C=-9.54

Answer

Answer

Therefore Project A alone maximizes net present value, giving choice D.

select Project A only(D)\boxed{\text{select Project A only}\quad\text{(D)}}

Calculator reproduction

BA II Plus keystrokes

Check END/BGN, period, sign, TVM, and cash-flow setup

  1. CF; 2nd CLR WORK; CF0=-800; C01=500; C02=500; C03=-175; C04=100; NPV; I=10; CPTNPV = 4.59Annual cash flows use their stated signs; this is Project A.
  2. CF; 2nd CLR WORK; CF0=-800; C01=500; C02=300; C03=-175; C04=150; C05=200; NPV; I=10; CPTNPV = -2.36Annual cash flows use their stated signs; this is Project B.
  3. CF; 2nd CLR WORK; CF0=-800; C01=500; C02=250; C03=-175; C04=200; C05=200; NPV; I=10; CPTNPV = -9.54Annual cash flows use their stated signs; this is Project C.