Question
RenewalEnergy is evaluating two potential projects with the following net cash flows. The companys discount rate is 14%. (PV of $1 = 0.877, PVIFA of
RenewalEnergy is evaluating two potential projects with the following net cash flows. The company’s discount rate is 14%. (PV of $1 = 0.877, PVIFA of $1 = 3.433, FV of $1 = 1.140, FVA of $1 = 5.047)
Year | Project Q Cash Flow | Project R Cash Flow |
0 | $(1,200,000) | $(800,000) |
1 | $260,000 | $200,000 |
2 | $320,000 | $250,000 |
3 | $380,000 | $300,000 |
4 | $440,000 | $350,000 |
5 | $500,000 | $400,000 |
a. Calculate the payback period for both projects. Which project is more favorable based on the payback period?
b. Calculate the net present value for each project. Which project should be selected based on the net present value?
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