Calculate NPV—rank projects using present value ratios The following capital expenditure projects have been proposed for management’s consideration at Heard, Inc., for the upcoming budget year:
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Project |
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Year(s) |
A |
B |
C |
D |
E |
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Initial |
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investment |
0 |
$(50,000) |
$(50,000) |
$(100,000) |
$(100,000) |
$(200,000) |
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Amount of |
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net cash return |
1 |
10000 |
0 |
32000 |
10000 |
60000 |
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. |
2 |
10000 |
0 |
32000 |
20000 |
60000 |
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. |
3 |
10000 |
20000 |
32000 |
30000 |
30000 |
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. |
4 |
10000 |
20000 |
32000 |
40000 |
30000 |
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. |
5 |
10000 |
20000 |
32000 |
50000 |
30000 |
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Per year |
6–10 |
10000 |
12000 |
0 |
0 |
30000 |
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NPV (14% |
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discount rate) |
2161 |
$ ? |
$ ? |
$ ? |
5884 |
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Present |
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value ratio |
1.04 |
? |
? |
? |
? |
Required:
a. Calculate the net present value of projects B, C, and D, using 14% as the cost of capital for Heard, Inc.
b. Calculate the present value ratio for projects B, C, D, and E.
c. Which projects would you recommend for investment if the cost of capital is 14% and
1. $100,000 is available for investment?
2. $300,000 is available for investment?
3. $500,000 is available for investment?
d. What additional factors (beyond those considered in parts a–c might influence your project rankings?