Question 1135985: Marie who is a business woman seeks to invest her money in any of two projects X and Y whose estimated cash flows are as follows: Project X will yield uniform cash flows of Ksh. 20,000 Per year for four years. Project Y cash flows are Ksh.30,000 in year 1, Ksh.22, 000 in year 2, Ksh.18,000 in year 3 and Ksh.15,000 in the fourth year. Advice the business woman on which project to invest in on using the net present value (NPV).
Answer by Theo(13342)   (Show Source):
You can put this solution on YOUR website! if you're doing a net present value analysis, you need to know what the required rate of return is.
that wasn't mentioned.
without knowing that, you can probably make an estimation at different rates of return to see where the break even point would be.
you can take the npv of plan x and the npv of plan y and determine which one is greater by comparing them.
you can also take the npv of (plan x minus plan y) and look for when the npv becomes positive.
a positive npv in a plan x minus plan y analysis means that the npv of plan x is greater than the npv of plan y.
a negative npv in a plan x minus plan y analysis means that the npv of plan x is less than the npv of plan y.
the woman is more than likely looking for a rate of return that is positive.
i therefore looked at different rates of return greater than or equal to 0.
in all cases, plan y gave a greater npv than plan x.
as the rate of return requirement got higher, the difference between plan x and plan y became greater in favor of plan x.
this indicates that there is no positive rate of return requirement where plan x will have a higher npv than plan y.
since plan y has a greater npv at all rates of return greater than or equal to 0, the woman is advised to go with plan y.
here's my excel spreadsheet analysis.
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