Capital Expenditure Data for Maryanne Company are given as follow:
	Project A	Project B
Initial investment	RM 42,000	RM 45,000
Year	Operating cash inflows (RM)
1	14,000	28,000
2	14,000	12,000
3	14,000	10,000
4	14,000	10,000
5	14,000	10,000

Calculate the net present value for project A and Project B. Assume that the cost of capital is 10%. 

The **Net Present Value (NPV)** is calculated using the formula:

\[
NPV = \sum \frac{C_t}{(1 + r)^t} - C_0
\]

Where:
- \(C_t\) is the cash inflow for year \(t\),
- \(r\) is the discount rate (cost of capital),
- \(C_0\) is the initial investment,
- \(t\) is the year.

Given:
- Cost of capital (\(r\)) = 10% = 0.10,
- Initial investment for Project A = RM 42,000,
- Initial investment for Project B = RM 45,000.

Let’s calculate the NPV for both projects.

### Project A:
Cash inflows:
- Year 1: RM 14,000
- Year 2: RM 14,000
- Year 3: RM 14,000
- Year 4: RM 14,000
- Year 5: RM 14,000

\[
NPV_A = \frac{14,000}{(1 + 0.10)^1} + \frac{14,000}{(1 + 0.10)^2} + \frac{14,000}{(1 + 0.10)^3} + \frac{14,000}{(1 + 0.10)^4} + \frac{14,000}{(1 + 0.10)^5} - 42,000
\]

### Project B:
Cash inflows:
- Year 1: RM 28,000
- Year 2: RM 12,000
- Year 3: RM 10,000
- Year 4: RM 10,000
- Year 5: RM 10,000

\[
NPV_B = \frac{28,000}{(1 + 0.10)^1} + \frac{12,000}{(1 + 0.10)^2} + \frac{10,000}{(1 + 0.10)^3} + \frac{10,000}{(1 + 0.10)^4} + \frac{10,000}{(1 + 0.10)^5} - 45,000
\]

I'll calculate both NPVs now.The Net Present Values (NPVs) for the two projects are:

- NPV for Project A: **RM 11,071.01**
- NPV for Project B: **RM 10,924.40**

Based on the NPV, Project A is slightly more favorable than Project B.

Would you like more details on these calculations or have any questions?

Here are 5 related questions you might consider:
1. What are the limitations of using NPV for investment decisions?
2. How does changing the cost of capital affect NPV?
3. What other capital budgeting methods can be used alongside NPV?
4. How does inflation impact NPV calculations?
5. What are the potential risks if the cash inflows are uncertain?

**Tip:** Always consider alternative methods like Internal Rate of Return (IRR) or Payback Period to cross-check investment decisions.

Capital Expenditure Data for Maryanne Company are given as follows:
Project A	Project B
Initial investment	RM 42,000	RM 45,000
Year	Operating cash inflows (RM)
1	14,000	28,000
2	14,000	12,000
3	14,000	10,000
4	14,000	10,000
5	14,000	10,000

Calculate the net present value for project A and Project B. Assume that the cost of capital is 10%.

Explore how to calculate the net present value (NPV) for Maryanne Company's Projects A and B with detailed steps. Learn to apply the NPV formula, discount cash flows, and compare the financial outcomes of the two projects. This example assumes a 10% cost of capital.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation