Suppose your manager has asked you to evaluate two investment opportunities that your company is considering. Using the information below, evaluate these two investments using the net present value method. As a result of your evaluation, will you need to make a recommendation to your manager about the relative attractiveness of these investments.
| Project | A | B |
|---|---|---|
| Cost of Investment | euro 3,000,000 | euro 2,000,000 |
| Useful life of investment | 4 | 4 |
| Estimated residual value | euro 500,000 | euro 0 |
| Expected annual cash flows | euro 900,000 | euro 1,100,000 |
| Cost of capital | 5% | 10% |
1. Calculate the net present value for each investment.
2. Based on your calculations above, briefly explain which investment is the most attractive one for your company and why.
Brunette Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $180,000. The present value of the future cash flows generated by the project is $163,000.
Should they invest in this project?
a. No, because the rate of return on the project is less than the desired rate of return used to calculate the present value of the future cash flows.
b. Yes, because the rate of return on the project is equal to the desired rate of return used to calculate the present value of the future cash flows.
c. Yes, because the rate of return on the project exceeds the desired rate of return used to calculate the present value of the future cash flows.
d. No, because the net present value is +$17,000.
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