Net Present ValueUnequal Lives

Project 1 requires an original investment of $51,000. The project will yield cash flows of $13,000 per year for nine years. Project 2 has a calculated net present value of $10,200 over a seven-year life. Project 1 could be sold at the end of seven years for a price of $55,000.

Use thePresent Value of $1 at Compound Interestand thePresent Value of an Annuityof $1 at Compound Interesttables shown below.

Present Value of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83320.8900.8260.7970.7560.69430.8400.7510.7120.6580.57940.7920.6830.6360.5720.48250.7470.6210.5670.4970.40260.7050.5640.5070.4320.33570.6650.5130.4520.3760.27980.6270.4670.4040.3270.23390.5920.4240.3610.2840.194100.5580.3860.3220.2470.162

Present Value of an Annuity of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83321.8331.7361.6901.6261.52832.6732.4872.4022.2832.10643.4653.1703.0372.8552.58954.2123.7913.6053.3532.99164.9174.3554.1113.7853.32675.5824.8684.5644.1603.60586.2105.3354.9684.4873.83796.8025.7595.3284.7724.031107.3606.1455.6505.0194.192

a.Determine the net present value of Project 1 over a seven-year life with residual value, assuming a minimum rate of return of 20%. If required, round to the nearest dollar.

$

b.Which project provides the greatest net present value?

Project 1