Principles of Managerial Finance

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.