Sol Station Products, Ltd. has allotted $100,000 in cash for its next large investment. The company has been presented with five alternative projects in which managers can invest. Four of the five potential projects require an initial cash investment (outflow) at the start of Year 1 (January 1st) and then additional cash investments (outflows) at some point during the life of the project. All five potential projects also offer a cash inflow each year the project is active (including a cash inflow at the end of Year 1). Every cash outflow, after the initial investment, and inflow during the life of the project will occur on December 31st (end of the year). The project details are as follows:

cash outflows: Project A Project B Project C Project D Project E

initial investment(Jan1st, year1) 80,000 75,000 85,000 40,000 100,000

Secondary investment(Dec 31, year 1) 0 0 5,000 40,000 0

secondary investment(Dec 31, year 2) 20,000 0 5,000 20,000 0

secondary investment(dec 31, year 3) 0 25,000 5,000 0 0

total cash outflow 100,000 100,000 100,000 100,000 100,000

cash inflows

annual cash inflows(dec 31, year 1-6) 9,000 27,0000 29,000 16,000 30,000

single cash inflow(dec 31, year 6) 180,000 0 0 100,000 0

life of the project 6 years 6 years 6 years 6 years 6 years

Project A Requires an initial investment of $80,000 at the beginning of Year 1 and a secondary investment of $20,000 at the end of Year 2. Annual net cash inflows of $9,000 are to be received each year on December 31st and the project is expected to last for 6 years. At the end of the 6th year, the project will also provide a large one-time cash inflow of $180,000.

Project B Requires an initial investment of $75,000 at the beginning of Year 1 and a secondary investment of $25,000 at the end of Year 3. Annual net cash inflows are expected to be $27,000 for each year and the project is expected to last for 6 years.

Project C Requires an initial investment of $85,000 at the beginning of Year 1 and secondary investments of $5,000 at the end of Year 1, Year 2, and Year 3. Annual net cash inflows are expected to be $28,500 for each year and the project is expected to last for 6 years.

Project D Requires an initial investment of $40,000 at the beginning of Year 1 and secondary investments of $40,000 at the end of Year 1 and $20,000 at the end of Year 2. Annual net cash inflows of $16,000 are to be received each year on December 31st and the project is expected to last for 6 years. At the end of the 6th year, the project will also provide a large one-time cash inflow of $100,000.

Project E The simplest project, requires an initial investment of $100,000 at the beginning of Year 1 and no secondary investments. Annual net cash inflows are expected to be $30,000 for each year and the project is expected to last for 6 years

Sol Station Products has a discount rate of 17% and will not accept any investments that return a negative or zero-dollar net present value. They would like to invest in the highest net present value project available. You may compute your answers using Excel-calculated PV factors as shown in class or you may use the PV Table provided on Blackboard. Please note, on the final exam, you will be expected to use the PV Table to calculate your responses. The PV Factors are rounded to three decimals, so this will be the one time I encourage using a rounded number in the middle of a problem!

Required: Compute the net present value for each of the potential projects then determine which project you recommend the company pursue. In your response, rank the projects from best to worst from a NPV perspective (meaning, identify the project with the highest NPV, the second-highest, etc.).

Optional: Compute the net present value for each of the potential projects using a discount rate of 15% instead of 17%. Does this change your conclusions and recommendations? What factors do you think most contribute to the differences you see in NPV