project selection

 You are a project manager working on contract for a farming cooperative. They've decided to introduce six new wild juice drinks to the market that mix combinations of exotic juices to create some new exciting flavors. You've performed a feasibility study to determine the best way to go about producing, manufacturing, and marketing the wild juice drinks. Your research has yielded three alternatives that you want to compare based on today's value. The project's initial investment is $29,000. Alternative A's cash flows are $14,000 for year 1 and $19,000 for year 2. Alternative B's cash inflows are $21,000 for year 1 and $20,000 for year 2. Alternative C's cash inflows are $15,000 for year 1 and $20,000 for year 2. Assume a 10 percent cost of capital. Which project should you recommend?

A)Alternative C

B)Alternative B

C)Alternative B and C are both acceptable

D)Alternative A

crushPMP's picture

B?

 

Project A

(Net) CF(in) = 14/(1.10) + 19(1.10)^2

= 12.72727 + 22.99

= 35.71727

(Net) CF(out) = 29

NPV = 35.71727 - 29 = 6.71727

Project B

(Net) CF(in) = 21/(1.10) + 20(1.10)^2

= 19.0909 + 24.2

=43.2909

(Net) CF(out) = 29

NPV = 43.2909 - 29 = 14.2909

Project C

(Net) CF(in) = 15/(1.10) + 20(1.10)^2

= 13.636 + 24.2

=37.836

(Net) CF(out) = 29

NPV = 37.836 - 29 = 8.836

endorse the calculations above and it is b

 I thought NPV calculation is not part of the exam.

Can you pls explain the calculation here, I understood that we are calculating PV and adding it.

But didn't get why using 14, 19 instead of 14,000, 19,000 etc

pls explain,

For simplicity and nothing else

 B

Can you explain as to why you have taken 14/1.1 for 1st year and 19* (1.10)^2 for the 2nd year

(Net) CF(in) = 14/(1.10) + 19(1.10)^2

Taking the formula PV=FV/[(1+r/100)]^n= 14 / [(1+10/100)]^1 is fine

Please explain the second part i.e., 19 * [(1+10/100)]^2

 

I have gone through this link, but not clear

http://pmi.books24x7.com/assetviewer.aspx?bookid=32027&chunkid=0192138754

 

B is the right answer

cnppmp's picture

based on the payback calculation done.


Regards


CN patil

cnppmp's picture

can we consider 10% cost of capital as rate of interest for PV calculation?


Cna anyone throw light ont this? I also got the right answer using the Payback period calcualtion.


 


Regards


CN Patil

 Yes, I think Iam wrong in taking 10% as rate of interest. Can you explain the payback period calculation or some reference based on which I can work out? 

cnppmp's picture

Paybak for project A:
Investment =29,000
cash inflow=14000 (1 year)+19000 (2nd year)
First year: 29000-14000=15000
so, 15000/20000
=0.75
so it's 1year 9 months


Payback for project B
Investment=29,000
cash flow=21000+20000
First year: 29000-21000= 8000
so, 8000/ 20000
=0.4
so, it's 1year 4 months


Payback for projectC
Investment=29,000
cash flow=15000+20000
First year: 29000-15000= 14000
so, 14000/ 20000
=0.7
so, 1 Year 8 months


So, so it is project B based less number of months for payback.
*******************************************************************************************************


using ROI:


ROI
Project A
33000-29000/29000
0.13


Project B
41000-29000/29000
0.41


35000-29000/29000
0.20.


 

 Thank You very much

Payback for project B
Investment=29,000
cash flow=21000+20000
First year: 29000-21000= 8000
so, 8000/ 20000
=0.4
so, it's 1year 4 months
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