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November 5th, 2015, 03:44 PM   #1
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From: canada

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Need some help understanding.

Hey guys,
currently working on a problem that is:

Britney javelin company is considering two investments, both of which cost \$15000. The cash flows are as follows:

year project a project b
1 \$8100 \$6750
2 5400 4050
3 4050 10800

which of the two projects should be chosen based on the net present value method? Assume a cost of capital of 7%.

b. NPV for Project a
Year Cash flow Present value @ 7%
1 \$8,100 \$7,570
2 5,400 4,717
3 4,050 3,306
Present value of inflows \$15,593
Initial investment 15,000
NPV (net present value) \$ 593


I am just confused on how on the 7570, 4717 and 3306 were found.

Thanks in advance for any help!

Last edited by skipjack; November 5th, 2015 at 04:15 PM.
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November 5th, 2015, 04:26 PM   #2
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\$8,100 / 1.07 = \$7,570.09
\$5,400 / 1.07² = \$4,716.57
\$4,050 / 1.07³ = \$3,306.01
etc.
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