Hittle Company is considering two mutually exclusive projects X and Y. The cost of capital for each project is 10%. The projects' expected net cash flows are as follows: Year Project X Project Y 0 - $10,000 - $10,000 1 4,500 3,500 2 3,000 3,500 3 3,000 3500 4 3000 3500 5 3600 3500 What are the correct NPVs of projects X and Y, respectively?

Project X:

NPV = $3108,55

Project Y

NPV = $3267,75

Explanation:

Giving the following information, we need to find the net present values of both projects:

Project X:

i=0,10

Cash flow=

0 = - $10,000

1 = 4,500

2 = 3,000

3 = 3,000

4 = 3000

5 = 3600

Project Y:

i = 0,10

Cash flow=

0 = - $10,000

1=3,500

2=3,500

3=3500

4=3500

5=3500

The NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

The formula is:

n

NPV = ∑ [Rt / (1+i) ^t]

t-1

where:

R t = Net cash inflow-outflows during a single period t

i=Discount rate of return that could be earned in alternative investments

t=Number of timer periods

In this exercise:

Project X:

NPV = - 10000 + (4500/1,10^1) + (3000/1,10^2) + (3000/1,10^3) + (3000/1,10^4) + (3600/1,10^5) = $3108,55

Project Y

NPV = $3267,75