Question

Kenner Company is considering two projects. Project A Project B Initial investment $85,000 $24,000 Annual cash flows $20,676 $ 6,011 Life of the project 6 years 5 years Depreciation per year $14,167 $ 4,800 Suppose that Kenner Company requires a minimum rate of return of 8%. Which project is better in terms of net present value

Answer 1

Answer: Project A is better as it has a higher NPV of $76,075.70

Step-by-step explanation:

Annual cashflow of Project A = Annual cashflow + Depreciation

= 20,676 + 14,167

= $34,843

Project B cashflow = 6,011 + 4,800

= $10,811

As these are constant amounts, they are to be considered annuities.

Find the present value of these annuities and deduct the initial investment from them for the NPV.

Present value of annuity = Annuity * Present value interest factor of annuity, 8%, number of years

Project A NPV = (34,843 * Present value interest factor of annuity, 8%, 6 periods) - 85,000

= (34,843 * 4.6229) - 85,000

= $76,075.70

Project B NPV = (10,811 * Present value interest factor of annuity, 8%, 5 periods) - 24,000

= (10,811 * 3.9927) - 24,000

= $19,165.08

Project A is better as it has a higher NPV of $76,05.70