FIGURE 9.2 Calculation of NPVs for Bennett Company’s Capital Expenditure Alternatives
Time lines depicting the cash flows and NPV calculations for projects A and B
402 PART 3 Long-Term Investment Decisions
Project A
1
$14,000
0
$42,000
53,071
k = 10%
NPVA = $11,071
2
$14,000
3
$14,000
4
$14,000
5
$14,000
Project B
End of Year
End of Year
1
$28,000
0
$45,000
25,455
$55,924
9,917
7,513
6,830
6,209
NPVB = $10,924
k = 10%
k = 10%
k = 10%
k = 10%
k = 10%
2
$12,000
3
$10,000
4
$10,000
5
$10,000
11071.01
42000 CF 0
CF 1
I
NPV
N
14000
5
10
Solution
Input Function
Project A
values for projects A and B of $11,071 and $10,924, respectively. Both projects
are acceptable, because the net present value of each is greater than $0. If the pro-
jects were being ranked, however, project A would be considered superior to B,
because it has a higher net present value than that of B ($11,071 versus $10,924).
Calculator Use The preprogrammed NPV function in a financial calculator can
be used to simplify the NPV calculation. The keystrokes for project A—the annu-
ity—typically are as shown at left. Note that because project A is an annuity, only
its first cash inflow, CF 1 14000, is input, followed by its frequency, N5.
The keystrokes for project B—the mixed stream—are as shown on page 403.
Because the last three cash inflows for project B are the same (CF 3 CF 4 CF 5
10000), after inputting the first of these cash inflows, CF 3 , we merely input its
frequency, N3.
The calculated NPVs for projects A and B of $11,071 and $10,924, respec-
tively, agree with the NPVs cited above.
Spreadsheet Use The NPVs can be calculated as shown on the following Excel
spreadsheet.