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Project A requires an original investment of $54,800. The project will yield cash flows of $15,600 per year for 4 years. Project B has a computed net present value of $3,070 over a 4-year life. Project A could be sold at the end of 4 years for a price of $17,100.

Following is a table for the present value of $1 at compound interest:

Year 6% 10% 12%
1 0.943 0.909 0.893
2 0.890 0.826 0.797
3 0.840 0.751 0.712
4 0.792 0.683 0.636
5 0.747 0.621 0.567
Following is a table for the present value of an annuity of $1 at compound interest:

Year 6% 10% 12%
1 0.943 0.909 0.893
2 1.833 1.736 1.690
3 2.673 2.487 2.402
4 3.465 3.170 3.037
5 4.212 3.791 3.605
Use the tables above.

a. Determine the net present value of Project A over a 4-year life with salvage value assuming a minimum rate of return of 12%. Round your answer to two decimal places.

You want the net present value of a project costing $54,800 and earning $15,600 per year for 4 years. The salvage value of the project is $17,100 after 4 years.

Annuity

The annuity table can be used to find the present value of the incoming cash flow:

present value of cash = 3.037 × $15,600 = $47,377.20

Salvage

The present value of the salvage value of the project after 4 years is ...

0.636 × $17100 = $10,875.60

Net Present Value

The NPV is the difference between the present values of the project's earnings and its cost:

NPV = $47,377.20 +10,875.60 -54,800 = $3,452.80

The net present value of Project A is $3,452.80.

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Additional comment

If we add up the discount factors in the first table, we get 3.038 as the multiplier of annuity value. This gives a slightly different answer. We have elected to use the annuity table value, as it requires less computational effort.