INVESTMENT APPRAISAL

Discounting and Alternative Investment Criteria

Discounting Problem

Consider the following two projects and their respective cash flow profile of net benefits:

Table $1$: Net Cash flows of Benefits for Project $1$

Year $123456789$

Net benefits $-500450500520600650700800200$

Table $2$: Net Cash flows of Benefits for Project $2$

Year $456789$

Net benefits $-400150200300400150$

$1.$ Assume that the interest rate in Year $1$ is $11\%$ and that it will decline by $1\%$ every year until Year $6$ and thereafter stay constant.

$$ By discounting the net benefits, calculate the net present values $($NPV$)$ of project $1$ as of Year $1,3$ and $7,$

$$ Find the net present values $($NPV$)$ of project $2$ as of Year $1,4$ and $6.$

$2.$ Again, assume that the interest rate in Year $1$ is $1\%$ and that it will increase by $1\%$ every year until Year $6$ and thereafter stay constant.

$$ By discounting the net benefits, calculate the net present values $($NPV$)$ of project $1$ as of Year $1,3$ and$7,$

$$ Find the net present values of project $2$ as of Year $1,4$ and $6.$

Compare the results in questions $1$ and $2$ above