Principles of Managerial Finance

(Dana P.) #1
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.
Free download pdf