A company is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. Which project should be selected given that the company's required rate of return is 10% 1 2 3 CFs -$2,050 $750 $760 $770 $780 CFL -$4,300 $1,500 $1,518 $1,536 $1,554
The Solution
Project S
Net present value is calculated using a financial calculator by inputting the below:
Press the CF button.
CF0= -$2,050. It is entered with a negative sign since it is a cash outflow.
Cash flow for each year should be entered.
Press Enter and down arrow after inputting each cash flow.
After entering the third cash flow cash flow, press the NPV button and enter the required rate of return of 10%.
Press enter after that. Press the down arrow and CPT buttons to get the net present value.
The net present value of cash flows is $371.18.
Project L
Net present value is calculated using a financial calculator by inputting the below:
Press the CF button.
CF0= -$4,300. It is entered with a negative sign since it is a cash outflow.
Cash flow for each year should be entered.
Press Enter and down arrow after inputting each cash flow.
After entering the third cash flow cash flow, press the NPV button and enter the required rate of return of 10%.
Press enter after that. Press the down arrow and CPT buttons to get the net present value.
The net present value of cash flows is $533.60.