Question 6.S-TQ4: Three investment projects have the following net cash flows....
Three investment projects have the following net cash flows. Decide which of them should be accepted using the NPV decision rule if the discount rate to be applied is 12 per cent.
Project A
| Year | Cash flow (£) | 12% discount factor | Present value (£) |
| 0 | (10,000) | 1.000 | (10,000) |
| 1 | 5,000 | 0.893 | 4,465 |
| 2 | 5,000 | 0.797 | 3,985 |
| 3 | 2,000 | 0.712 | 1,424 |
| 4 | 1,000 | 0.636 | 636 |
| Net present value |
510 |
Project B
| Year | Cash flow (£) | 12% discount factor | Present value (£) |
| 0 | (15,000) | 1.000 | (15,000) |
| 1 | 5,000 | 0.893 | 4,465 |
| 2 | 5,000 | 0.797 | 3,985 |
| 3 | 5,000 | 0.712 | 3,560 |
| 4 | 10,000 | 0.636 | 6,360 |
| 5 | 5,000 | 0.567 | 2,835 |
| Net present value |
6,205 |
Project C
| Year | Cash flow (£) | 12% discount factor | Present value (£) |
| 0 | (20,000) | 1.000 | (20,000) |
| 1 | 10,000 | 0.893 | 8,930 |
| 2 | 10,000 | 0.797 | 7,970 |
| 3 | 5,000 | 0.712 | 2,848 |
| 4 | 2,000 | 0.636 | 1,272 |
| Net present value |
1,020 |
Summary
| Project | NPV (£) | Ranking |
| A | 510 | 3 |
| B | 6,205 | 1 |
| C | 1,020 | 2 |
Since all three projects have a positive NPV, they are all acceptable.
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