Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Project E Project H
($30,000 Investment) ($28,000 Investment)
Year Cash Flow Year Cash Flow
1 $8,000 1 $17,000
2 11,000 2 12,000
3 12,000 3 10,000
4 15,000

Required:
a. Determine the net present value of the projects based on a zero percent discount rate.
b. Determine the net present value of the projects based on a discount rate of 11 percent.

a. The net present value of project E based on a 0% discount rate is $16,000

The net present value of project H based on an 11% discount rate is $11,000

b. The net present value of project E based on a 0% discount rate is  $4,790.32

The net present value of project H based on an 11% discount rate is $4,366.70

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.  

When choosing between positive NPV projects, choose the project with the highest NPV first because it is the most profitable.

NPV can be calculated using a financial calculator

Project E

Cash flow in year 0 = -30,000

Cash flow in year 1 = $8,000

Cash flow in year 2 = $11,000

Cash flow in year 3 = $12,000

Cash flow in year 4 = $15,000

NPV when I is 0% = $16,000

NPV when I is 11% = $4,366.70

Project H

Cash flow in year 0 = $-28,000

Cash flow in year 1 = $17,000

Cash flow in year 2 = $12,000

Cash flow in year 3 = $10,000

NPV when I is 0% = $11,000

NPV when I is 11% = $4,366.70

To determine NPV using a financial calculator take the following steps:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

For more information on net present value, check here :

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